Tax provisions attached to the Emergency Economic Stabilization Act of 2008 includes a 2 year seamless extension of the R&D tax credit for 2008 and 2009, and increases the Alternative Simplified Credit rate to 14% in 2009.

The R&D Credit has been part of the Internal Revenue Code since 1981; however, a large number of companies have not taken advantage of this provision. In the past, the rules were very confusing. It was hard to determine who qualified, let alone which products or processes might qualify. While the rules are still complex, a company may be able to claim the credit providing that they are conducting research in the US, and if they meet the four following criteria:

Four-Part Test

1. Permitted Purpose: The activity must result in a new or improved process, function, product, performance, reliability, quality, or significant reduction in cost. Probably the most common type of activity overlooked by companies regarding these specific criteria involves significant improvements made to production-line operations. A very common example of this sort of improvement would be the updating of production-line capabilities by a manufacturer that ultimately improved efficiency, increased production capacity, and eventually yielded an overall reduction in costs. An example of this type of activity would be a company that manufactures heavy equipment, and relied upon a labor-intensive approach to production. If that company were to implement improvements in its manufacturing process, by way of automation or some other means that required investment in new equipment for the plant floor, then it’s very possible that the costs associated with the implementation of the new production process could be eligible for the R&D tax credit.
   
   
2. Elimination of Uncertainty: Were the activities conducted and intended to eliminate uncertainty concerning the development or improvement of a product? This criterion specifically involves the identification of information that is uncertain at the onset of the project or activity. Such uncertainty can relate to the capability of the product, the method used to produce it, or the appropriate design of the product. The examples that we typically encounter when consulting with clients in this arena deal with issues such as: Will the new or improved manufacturing process integrate with our current system, on any level? Will our new product development meet the customer specifications? Will the potential benefits outweigh the potential risks? Or will the new or improved product or activity even work?
   
   
3. Technical in Nature: Does the research fundamentally rely on the principals of, engineering, physical or biological science, or computer science? This criterion is usually a fairly easy one to deal with. What it really does is eliminate the soft sciences from the formal definition of technology. In other words, products or activities that are predicated upon literary, historical or social sciences do not qualify for the R&D Tax Credit. In all of our experiences, this technology criterion has never been an issue when performing an R&D study for a manufacturing company. 
   
   
4. Process of Experimentation: Does the activity involve developing one or more hypotheses for specific design decisions, testing and analyzing those hypotheses, and refining and discarding the hypotheses? A key factor regarding the Process of Experimentation hurdle was recently crystallized, when Treasury Regulations changed the wording to evaluation of one or more alternatives. Previous language defined the process as evaluation of more than one alternative.

For more information on the R&D Tax Credit, Click Here.

R&D Tax Credit Contact Information:

Richard Wright, CPA: Mr. Wright is responsible for managing the firm’s research & development tax credits service area. He assists manufacturing, technology and software companies in New York and nationally to successfully reduce their tax liabilities by uncovering R&D credits. Mr. Wright has had articles published nationally on R&D tax credits in Manufacturing & Engineering Magazine, the publication of the Society of Manufacturing Engineers (SME) and Leading Edge Magazine, the Magazine of the Leading Edge Alliance, which is a peer group organization of over 50 progressive public accounting firms in the U.S. Additionally he is a member of the American Institute of Certified Public Accountants (AICPA) and the New York State Society of Certified Public Accountants (NYSSCPA).

Listen to our R&D Tax Credit Radio Commercial:  as heard on the Buffalo Bills Radio Network!