The Hidden Treasure of R&D Tax Cuts
One presentation at the 2010 Prepared Foods’R&D Applications Seminar-Chicago provided insights into how some companies may be missing out on an important way to reduce R&D costs--without cutting resources.
May 9/Prepared Foods’ May 2011 --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.<br><br>
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.
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 the qualified activities. R&D specialists identify expenditures that qualify for federal and state R&D tax credits. Activities for tax years open under the statute of limitations are analyzed, to determine eligibility and leading up to refund claims.
The process is scalable to the size and complexity of a business. RSM McGladrey performs an initial scoping process--to determine the estimated costs and benefits of performing the study--before either party commits. R&D projects also undergo a quality assurance review by the company’s national tax office.
In addition to helping increase cash flow, RSM shares important information about the R&D credit with its clients. It also works with them to develop internal procedures necessary to help track and support these expenses in the future.
The national RSM McGladrey R&D team is composed of more than 60 R&D specialists, and activities are coordinated on a national basis. The team also has experience in large and small case IRS examination and appeals support.
The rules in this area are regularly changing; keeping abreast of these changes can be an ongoing challenge. The company maintains contacts within the U.S. Department of Treasury, the IRS, Congress, the National Association of Manufacturers and the U.S. Government Accountability Office (GAO). It acts as advocates on behalf of the companies it serves and is regularly sought out by those agencies to help them understand the impact of legislation and requirements on the middle market.pf