Haven't taken an R&D tax credit lately? Look again

Guest Commentary
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Sunday, May 1, 2005

Have you looked to Uncle Sam recently to help fund research and development costs? If not, now is the time to reconsider. The security alarm industry is rich in R&D and is ripe for R&D tax credits available under current federal tax laws.
The R&D credit is available to companies that have invested money in new products or improved product lines, software applications and improved or streamlined manufacturing processes. Moreover, tax law now allows companies to reclaim their R&D investments for up to three previous years, making the R&D tax credit seem like a windfall to some companies.
Qualified R&D expenses are much broader than what a controller reflects on the R&D line on a financial statement. Expenditures that qualify for the R&D credit include wages and associated benefits, costs of supplies and contract research expenses. Companies may list the expenses under other categories such as engineering.
Although R&D tax credits have been around for a long time, many companies have not taken full advantage of them. Some may not be aware of the credit or the magnitude of R&D costs that could qualify for the credit or they may not understand the eligibility rules. Others might be concerned that taking an R&D tax credit could trigger an audit. That may have been the case in the past. Today, however, there are clearer guidelines on what qualifies for the R&D tax credit and what type of documentation is required to support the credits, helping prevent the IRS from incorrectly interpreting and applying the rules.
Final regulations issued in 2003 broadened the eligibility to claim R&D tax credits to many more companies, not merely to reclaim technological advancements but also traditional manufacturing activities. The regulations also allowed companies the opportunity to revisit their operations within the last three years and pull in more functional activities to recover additional R&D. To get the full R&D credit, it takes more than just knowledge of the tax law. An in-depth understanding of processes to appropriately develop methodologies for uncovering R&D activities eligible for the credit is necessary.
Companies interested in the R&D tax credit should seek professional assistance. The experience of the professionals performing the R&D study is vital. Obtaining the full R&D credit takes more than an understanding of the tax law. It also requires an in-depth understanding of processes to develop appropriate methodologies for uncovering R&D activities eligible for the credit. We have found that many R&D studies do not identify accurately and/or completely R&D activities and employees connected with R&D. As a result, many companies miss out on potential R&D credits and significant refund claims.
The amount of savings any company can expect from the R&D tax credit depends on its work processes, tax processing and other factors. The potential for improved cash flow, more funds available for additional investment in new products and processes and increased returns to investors makes it well worth the time to investigate. R&D experts, who are solely committed to this area of tax law and have performed many R&D studies, can help maximize the benefit.

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Michael D. Fox is the director of the Security Alarm Industry Group of American Express Tax and Business Services Inc. He can be reached at 312-634-4311 or via e-mail at michael.d.fox@aexp.com.