Understanding the R&D Tax Credit

One presentation at the recent Prepared Foods’ R&D Applications Seminar-Chicago provided insights into how some companies may be missing out on an important way to reduceUnderstanding the R&D Tax Credit R&D costs – without cutting resources. 

Prepared Foods – Research and development tax credits can result in permanent tax savings for many types of businesses. A variety of industries can qualify for the credit, including food manufacturing and pharmaceuticals. The R&D tax credit helps companies reduce taxes and get cash; it is a tax provision designed to stimulate economic growth. 

In a recent Prepared Foods’ R&D Seminar titled, “R&D Tax Credits – The Hidden Treasure,” Byron Schneidman, managing director, RSM McGladrey, said RSM McGladrey has a team of specialists dedicated to helping companies increase the after-tax return on their R&D investment–by taking advantage of the R&D credit and other related tax incentives. To qualify for the credit, an activity must include the following elements: permitted purpose; elimination of uncertainty; process of experimentation; and be technological in nature. 

The term “permitted purpose” means the activity must be related to new or improved function, performance, reliability or quality. “Elimination of uncertainty” refers to the fact that activities need to be intended to eliminate uncertainty, concerning the development or improvement of a product or process. The “process of experimentation” means a company must show systemic testing of alternatives and evaluations of results were conducted. And, finally, showing a process was “technological in nature” requires demonstrating that the research activity relies on principles of physical science, computer science or engineering.

When Opportunity Knocks Many companies overlook this opportunity, but a company may benefit from an R&D tax credit, if it engages in one or more of the following activities: develops new or improved products; develops new or improved manufacturing processes; increases automation; designs and fabricates tools and dies; develops production equipment; and develops new or improved software applications. Furthermore, the Internal Revenue Service recognizes that many changes in operations and product lines are evolutionary, rather than revolutionary in nature. This, therefore, broadens the potential opportunity. 

The industries in which companies may qualify for the tax credit include manufacturing (high-tech, food processing, aerospace and defense, and equipment and component parts). Other areas that may qualify are pharmaceuticals and biotech; architectural and engineering; energy and utilities; telecommunications; and financial services. 

As reported in the “RSM McGladrey 2009 Manufacturing and Wholesale Distribution National Survey,” 46% of respondents reported they are not utilizing the R&D tax credit. That means there are still thousands of manufacturing companies eligible for the R&D credit that have not been claiming it, said Schneidman. physical science, computer science or engineering.

Traditional methods of quantifying costs associated with qualifying R&D activities have come under increased IRS scrutiny, and the bar has been raised on documentation necessary to meet the “more likely than not” level of assurance necessary for FIN 48, Circular 230 and section 6694 preparer penalty compliance. 

These new developments have many R&D tax credit service providers scrambling to change their approach. RSM McGladrey has been following these developments closely and continuously updating its tools and processes, to stay ahead of the curve and put clients in the best position to claim and sustain R&D tax benefits. 

R&D Credit Approach An “RSM McGladrey R&D Tax Credit Study” includes a technical assessment and documentation of th