Powder Coated Tough - Spring 2008 - (Page 48) TOUGH TALK What to Know About the Federal R&D Tax Credit BY GREG KNARR A powder coater who isn’t always looking for ways to enhance the bottom line won’t be in business for long. That’s something you learned long ago, and it’s why you constantly seek out opportunities to reduce your costs. One place you do that is on your tax returns, and you probably take pride in capturing every deduction you can. But what if I told you that you’re probably missing out on one of the single biggest tax breaks that Congress has created? Even though I don’t have specific details about your business, I’ve worked with enough of your peers to know that most of them missed it, too. If you’ve invested in the future of the company, you’ve probably earned a substantial tax break, through what is known as the Section 41 Research & Development Tax Credit. It’s a credit Congress developed (and later expanded) to give companies like yours a solid incentive for product innovation and process improvement. If it’s such a good break, why do so many companies miss it? Well, if you think most tax law is confusing, you haven’t seen anything. While the Section 41 credit is perfectly legitimate, Congress and the IRS haven’t made it very easy to claim the credit. In fact, it’s such a complicated process involving specialized knowledge that many skilled CPAs are either unfamiliar with it or simply choose not to pursue it. The R&D credit is even better than a tax deduction, because it’s a credit against the taxes you owe. Deductions reduce your income, which proportionally reduces the taxes you owe. If your total tax rate is 27 percent, and you have a $1,000 deduction, you’ll effectively reduce your taxes by $270. But if you have a $1,000 tax credit, you reduce your taxes by the full $1,000. The other key advantage of the R&D credit is that you can claim it retroactively. If you meet the standards for the credit, you can generally claim it for the past three tax years and receive a current-year refund for your past unclaimed credits. That can provide a dramatic, immediate boost to your company’s cash flow. So how exactly does the R&D credit work, and how might it apply to a company like yours? Essentially, the law provides a credit for what the IRS calls Qualified Research Expenditures, or QREs. Those QREs can include a broad variety of expenses and investments that you make to improve your products and your processes. Suppose you put three employees to work full-time for a month to improve some aspect of your manufacturing process. Their wages during that time are probably a QRE. A customer asked you to change a material for better performance? Much of what was involved in making that happen could be a QRE. And that programmer who developed that software module for your production system? It’s another likely QRE. You would have invested in all of those things without knowing that the credit was available. That’s smart business. But isn’t it nice to know that you’ll be rewarded for it? How do you go about getting the credit? That’s where it becomes challenging. The IRS examines the Section 41 credit in an extraordinarily detailed manner, and the key to qualifying is to document your claim the right way. Your documentation has to explain the expense and what makes it a QRE—and it’s not an easy process. That’s where expert help comes in. A firm that specializes in pursuing the R&D credit can review your operations and your work, and identify QREs you might otherwise miss. R&D credit specialists also know what the IRS expects to see in documentation, so they can prepare it more efficiently. In addition, firms that specialize in the credit typically work on a contingent fee basis, so they receive compensation only if they spot opportunities for the credit. Is your company eligible for the Section 41 credit? If you’ve invested in ways to improve what you offer—or how you produce it—the odds are in your favor. Spending a little bit of time with an R&D tax professional may prove to be surprisingly rewarding. Greg Knarr is a partner with Meridian Tax Advisors. To learn more about the federal Section 41 credit, call 317-569-1370, or visit www.meridiantaxadvisors.com. 48 Powder Coated Tough http://www.meridiantaxadvisors.com
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