Opportunities to claim the R&D tax credit: new regulations offer alternative to leaving money on the table.

• Author: Nett, Brandon
• Position: FINANCIAL SERVICES

Alaska businesses leave thousands of dollars on the table in available tax credits for research and development (R&D) expenses. The federal government, the state of Alaska, and many other states offer incentives for conducting research activities, but most Alaska businesses do not realize their activities may qualify for a credit.

These federal and state tax credits are not intended to apply to activities solely performed in a laboratory setting by Ph.D. recipients in white coats. Several different activities, including many of those related to manufacturing, construction, engineering, software development, or technical services, may qualify for a tax credit. And now, new regulations provide an opportunity to claim a simplified R&D credit.

The R&D Credit

The Internal Revenue Service (IRS) Credit for Increasing Research Activities, also known as the Research and Development credit or Research and Experimentation credit, is a tax credit for businesses that incur R&D expenses in the United States. The credit is a significant benefit for companies and is a dollar-for-dollar offset to a company's tax liability.

The federal credit benefit can be approximately six cents to seven cents on each dollar of R&D spending. R&D credits can be used to offset current-year tax liability, can be taken back to offset prior-year tax liability for a tax refund, and carried forward for up to twenty years for use against future tax liabilities.

Additionally, many states provide an R&D incentive separate from the federal credit. The Alaska state credit, for example, piggybacks off the federal credit in terms of criteria and federal qualification requirements and allows a state tax credit for 18 percent of the apportioned federal credit.

What Constitutes R&D

The first step in claiming the R&D tax credit is to identify qualified research activities. A company must engage in product or process development, which can encompass a number of areas not typically thought of as R&D. Companies that engage in any of the following activities may qualify for the credit:

* Manufacture products

* Develop new products

* Improve existing products

* Develop formulas or techniques

* Develop or improve technical processes

* Create or test prototypes

* Use new materials

* Test new concepts or technologies

* Apply for patents

* Design tools or molds

* Customize equipment or machinery

* Develop or enhance software (for sale or internal use)

* Employ engineers, scientists or other...