R&D in the USA
Claiming Research & Development or R&D in the US has now become easier.
Many US manufacturers are beginning to experience the negative impacts of cheap offshore labor. Lower labor rates in the east and higher global competition is becoming an ever more present threat to the manufacturing base of the United States.
As a result, the Bush Administration has responded by providing extra tax relief to US companies by broadening the envelope for claiming the R&D tax credit.
Governments in western countries such as the United States understand that in order for companies to remain competitive in a global market, technology and innovation is their greatest asset, not cheap labor.
Companies that spend the most on technical product and process development are the ones that are most likely to remain in business, hire skilled labor, and contribute to the local economic tax base. These same companies tend to also be more resilient in bad economic times. Governments also realize that tax relief in the form of tax credits encourages companies to undertake projects with risk. The R&D Tax credit provides American companies with excess money for capital expenditures to reduce costs, positive cash-flow, and extra marketing dollars to promote commercialization efforts.
All members of G7 countries have an R&D tax credit program in place. In all cases, the definitions are consistent with the internationally accepted definition used by the Organization for Economic Co-operation and Development (OECD). In the United States, the R&D tax credit provides companies with a 20% tax credit on qualified expenditures.
Salaries or wages of technical staff who work directly or manage the development projects. Salaries or wages of other staff that support the technical staff on the development projects e.g. administration.
Materials that were consumed or scrapped during the development project. Materials, jigs, tools, presses and so forth that were discarded during the development projects.
Subcontractor charges for work performed in the development project.
US Program Overview
Up until 2001, the R&D tax credit program in the US primarily rewarded companies that conduct intensive “research and development” type of activities. The regulations passed by the Clinton Treasury limited the value of the current research credit and made it rather difficult for companies to qualify and obtain.
In December of 2001, the Bush Administration issued new IRS regulations, which made it significantly easier to qualify for the Research and Development tax credit. The program was streamlined and broadened to allow “Experimental Development” type of activities to qualify, not just pure Research and Development”.
Currently the program is only 5 billion dollars a year, proportionately less than Canada’s 2 billion dollar a year program. Of the 5 billion dollars, 80% of the fund is consumed only by few of the nation’s largest companies, making it an immediate source of untapped cash for many small to medium sized companies.
Many small to medium sized companies fail to claim because they are unaware of the recent changes that were passed to allow experimental development to qualify. These same companies also tend to contract the services of smaller accounting firms who typically have little in-house experience and knowledge of the R&D tax credit program, as it requires a highly skilled level of engineering competence to properly identify and claim.
Many companies develop new products and processes to keep ahead of the competition, to improve their existing products, and/or to reduce their costs. Their objective is not necessarily to improve the Knowledge State of the public domain. They achieve their objectives through Experimental Development "ED" activities rather than Basic Research. Their motives are related to the global competitive position in the market and there is nothing wrong with such a motive. To the contrary, the ITA requires that the activities must be related to their business. Regulations in the USA specify that the activities be required to enhance a business component.
Typical Qualified Experimental Development Activities
These may include work on developing prototypes, custom designed machinery, software, new manufacturing processes, developing new materials and manufacturing techniques. The techniques of such projects are neither available in the public domain, nor known as standard practice in their industry. Many of these activities may be perceived as "routine" engineering, yet certain aspects may qualify as R&D, in part or in total, due to their complexity. To qualify, they must lead to the evolution of new Technologies, Methodologies, or the resolution of Technological Uncertainty.
If your company is involved in the following activities, you may be eligible for the R&D tax credit:
develop new, improved, or more reliable
products and processes
develop prototypes or models
experiment with new materials
design of custom machinery, tooling, dies, and molds
apply for patents
develop custom software or implemented new systems
built new manufacturing facilities
automate internal process
pay outside consultants and subcontractors
3 Criteria must be met to qualify for an R&D Tax Credit:
1. Scientific or technological advancement
Occurs when the goal of the project is to achieve a new technical improvement or a cost reduction through a technological application that is new to your business, not the industry. The knowledge and information gained from this project will generate an advanced understanding of this technology.
Example: If the work performed is custom and cannot be purchased off the shelf or if there is no specific “how to” instructions available in the public domain such as in textbooks, Internet, or industry journals, then the work would qualify as technological advancement.
2. Scientific and Technological Uncertainty
Occurs whether the end result or the objective at the onset of a project can be achieved. If your company is unsure as to how the objectives will be met and has to undertake a process of experimentation to determine the best technical path to meet the customer’s requirements, then the likelihood of uncertainty exists.
Routine engineering however does not qualify under this program. Routine engineering occurs when a series of publicly known steps and instructions are faithfully followed to successfully produce the desire results without error or experimentation. Important to note that “routine engineering” that supports a qualified technical advancement is eligible.
Example: If a mold maker produces a mold that has to achieve extremely difficult and tight tolerances as set by the customer, and they are unsure that they can be met, then the mold maker is confronted with uncertainty.
3. Scientific or Technological Content
Occurs when work is undertaken in a systematic and investigative process by qualified personnel with relevant experience to solve the scientific or technological uncertainty. There must be an initial consideration of options and engineering sound choices to determine the best course of action.
Example: You receive a request for quotation with detailed specifications that your project must meet. You review the criteria and come up with your quotation on how you are going to build it utilizing which components. This work is your initial hypothesis, the work that then takes place to complete the project and de-bugging shows the testing and changes that you went through to make it work.
Work performed may be
A) Basic Research, namely work undertaken for the advancement of scientific knowledge without a specific practical application in view.
B) Applied Research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view.
C) Experimental Development, namely, use of the results of basic or applied research for the purpose of creating new, or improving existing materials, devices, products or processes, work with respect to engineering, design, operation research, mathematical analysis, computer programming, data collection, testing and psychological research where that work is commensurate with the needs, and directly in support of the work described in (a), (b), or (c).
US Tax Credit Opportunity
Costly misconceptions about the R&D Tax Credit
It is our experience that many companies are unaware of the significant tax saving incentive that is available through the IRS. The R&D tax credit is often overlooked by organizations that do not normally associate R&D to their business or industry. Many of our clients used to regard their day-to-day business as “just doing my job”, when in fact they have been performing R&D qualifying activities all along.
There are also many companies whose accountants were in disbelief when we successfully generated an R&D tax credit for their client. Typically the general consensus amongst most accountants is that their clients operation has no merit for an R&D claim – a costly assumption. Our goal is to educate companies and their accountants by demonstrating how to properly claim the R&D tax credit using our proven methodology and 19 years of experience and multi-disciplined engineering competence.
Results speak for themselves
Today, we are successfully generating a 20% tax credit for many US companies resulting in hundreds of thousands of tax saving dollars and refunds. The R&D tax credit, which can be carried forward for 20 years, is not a deduction but rather a dollar for dollar credit against taxes paid or taxes owing.
Never claimed before? Good News!
If you are a first time claimant, you can claim 100% of all your costs associated to “Research and Development” for year one. There is a complex averaging formula used to calculate the tax credit for the subsequent years. We can also go back to all the tax years that are still opened, usually 3-4 years. Additional years may be available if you are in a net operating loss or alternative minimum tax position. The R&D tax credit expires June 2004. There is pressure to make the R&D tax credit permanent tax legislation, however up until then, Congress has to vote in order to reinstate it for another term.
New Changes in Regulation
Congress and the IRS are working in harmony to streamline the R&D program by broadening the scope of activities that qualify as R&D and making it easier for companies to apply. The IRS now offers greater flexibility for record keeping requirements and significantly expanded the definitions for Research and Development by allowing Experimental Development-related activities.
Why use our Services? Knowledge and Experience!
We know how to successfully claim and maximize each R&D tax credit claim. We have over 15 years of experience, a 100% success rate and generated millions of dollars in credits and refunds for our clients.
We are a true pioneer and remarkable authority in this field. There is no one set of tests, or rules that can be modeled in a spreadsheet for everyone to follow in order to file a successful claim. Sure, many companies may receive a tax credit but could that tax credit have been financially greater?
To properly identify and claim an R&D activity, it is very much a judgment call, which is dependent on one’s own ENGINEERING competence, expertise and experience in relation to the nature of the claim. Let us define what constitutes a successful claim. Our proven track record and precedence-setting results have made us a name you will trust and ultimately be rewarded for.
To know more about how you can qualify for this tax incentive, GET YOUR FREE REPORT:
"How To Qualify For The R&D Tax Incentive Program"
It will tell you exactly what you need to know about the R&D qualification process & if it actually applies to you.
Call us toll free at 1-800-316-0939 or if you prefer you can also email it to us with "I WOULD LIKE TO RECEIVE THE FREE REPORT" in the subject line and it will be sent to you within 24 hours.