BY GARY PURPURA AND MARK DUNNING
Google does it. Boeing does it. So do many small to midsized companies. All take advantage of a dollar-for-dollar reduction in federal taxes called the research and development tax credit.
Every year, companies big and small benefit from the $7.5 billion in credits available from the federal government for engaging in qualified R&D activities. Companies that experiment with and resolve technological or design challenges in the production of goods and services may be eligible for R&D credits. This could be you.
The R&D credit was created in 1981 as part of the Economic Recovery Tax Act to encourage economic growth and increase research activities in the U.S. Manufacturing companies make up about 43 percent of all corporations filing for the R&D tax credit, but aerospace, biotechnology, engineering and numerous other sectors are benefiting from research credits for qualified activities.
Companies willing to analyze eligible expenses may benefit from tax credits that could reach into the millions of dollars. A startup software company with just more than $1 million in revenue could see $50,000 in R&D credits. A medical device company with $300 million in revenue may receive more than $1 million in research credits.
As an added bonus, businesses claiming the credit may also see their tax bill reduced. In 2013, many companies on the S&P 500 reported significant drops in their effective tax rates due primarily to the R&D credit.
R&D credits are not just for big enterprises. Roughly one-fourth of all businesses that claim research credits have assets of less than $1 million. Unfortunately, many small to midsize companies do not realize they qualify for the credit and it goes unclaimed. All but the smallest companies could reduce the cost of labor-intensive R&D investments by taking advantage of available research credits.
The Internal Revenue Service has high standards for companies submitting claims for R&D credits, though. Consult a tax adviser to determine qualified expenses and guide your company in the critical collection of records that justify those expenses to the IRS.
Gary Purpura, managing partner of Colorado-based TaxOps in its Stamford office, specializes in helping partnerships and corporations develop tax strategies and deal with complex compliance and financial reporting needs. He can be reached at gpurpura@taxops.com or 203-307-2820. Mark Dunning, managing partner of TaxOps Minimization, brings technical knowledge of research credits to companies of all sizes. He can be reached at mdunning@taxops.com or 720-227-0420.
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