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October, 7, 2011
By now, most Houston companies and CPAs know the R&D credit exists, and the Fortune 500 routinely takes
advantage of this powerful incentive.
What most Houston small and medium-sized businesses don't realize is that the R&D credit, formally known as the Credit for Increasing Research Activities, actually applies to a broad swath of entities and industries. Although many folks view the research credit as something that's available only for those in white lab coats working in sophisticated laboratories, the reality is that manufacturers, software developers, A&E firms, agricultural companies and those in the oil and gas industry are just a small cross section of local businesses that are eligible for the credit.
How it works
The R&D credit is 20 percent of a company's qualified research expenses, or QRE, that exceed a base level determined by the company's prior research. Taxpayers can also opt to calculate an alternative simplified credit calculation of 14 percent of QREs over a simplified base amount. While approximately 35 states also have R&D credits of their own, Texas eliminated nearly all of its credits, including its state R&D credit, as of 2007, but the federal is still available.
Where many companies go awry is in self-censoring their activities. Research does not need to be new to the world, just subjectively new to the taxpayer. In order to qualify for the credit, a company's research simply has to meet a four-part test. The research must be performed to develop a new or improved product, process, invention, technique, formula, or computer software. Basically, if you are doing anything to make your products or processes bigger, faster, stronger or greener, then you are most likely conducting R&D.
The taxpayer must be uncertain as to the capability of achieving its goal (whether it can get from point A to point B), the method of achieving its goal (how to get from point A to point B), or the design of the end product
(what B needs to look like when they get there).
To try to resolve this uncertainty, the taxpayer has to engage in a process of experimentation. Again, no lab coat required; a systematic trial-and-error process is sufficient.
Finally, the information the taxpayer is trying to discover must be technological in nature (based on the principles of biology, chemistry, physics, engineering or computer science).
Unless your company is making the same widget, the same way, each time, you're probably doing some R&D.
We have seen many great Houston-area companies conducting R&D without realizing they are eligible for the credit. For example, we aided Company X, a contract manufacturer, that has $35 million in revenue and $1 million in qualified research expenditures. Company X was eligible to claim $100,000 in R&D credits.
Another example is Company Y — a company that makes oil drilling equipment and has revenue of $80 million and QREs of $3.5 million Company Y was eligible to claim $325,000 in R&D credits.
R&D credits: good for your business and your bottom line.
Dean Zerbe is a national managing director of Houston-based alliantgroup and was formerly senior counsel and tax counsel to the Senate Finance Committee.
Kevin Corley is a senior managing director of alliantgroup, focusing on business development in Houston. For more information about alliantgroup, visit alliantgroup.com.
Re-preinted from Houston Business Journal. Source: http://www.bizjournals.com/houston/print-edition/2011/10/07/maximizing-the-bottom-line-with-rd.html
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