Getting credit for R&D: improving your business can generate tax savings.

AuthorHammel, Jerry M.
PositionADVICE: TAX

EACH YEAR MANUFACTURERS claim billions of dollars in federal and state tax credits by taking advantage of incentives to invest in research and development. Companies that are not taking advantage of these potentially lucrative tax savings, because they do not feel they qualify, often confuse what they define as research and development with what the IRS defines as research and experimentation.

The credit allows you to claim credit for "qualified research expenditures" (QREs)--costs associated with investments in innovation and improvements that go well beyond product R&D. For example, investments made in process improvements may qualify, and many manufacturers invest far more in improving their processes than in developing products.

Having QREs is only part of the picture. The IRS subjects research tax credits to intense scrutiny, so you need detailed documentation demonstrating that each QRE meets the criteria. An extensive case must be built prior to a company claiming the credit. The case should include a detailed explanation of the arguments for qualification and should provide all the necessary documentation in an easy-to-follow format.

Will pursuing the credit pay off for your company? If you are a company that invests in advancing your products or innovating your processes, your pursuit of the credit should yield significant current and future year tax savings. An Indiana company that conducts these types of activities can obtain combined federal and state tax savings of up to 12 percent of their investment in developing new products or processes. This is a true tax credit (dollar-for-dollar reduction of your tax), and not just a deductible expense. In addition to establishing this tax strategy going forward, the law...

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