[IMGCAP(1)]While both houses of Congress have addressed the passage of tax extender legislation, it is unlikely that anything will come of their efforts until after the midterm elections. One of the expired provisions that haven’t yet been extended is the R&D, or research, credit. If any provisions do get extended, this is one that will be in whatever package makes it to the President’s desk for his signature.
Yet, that is only half the battle, when it comes to realizing its potential to spur innovation among the small and midsize businesses that need it most, according to Ben Kaplan, tax director at McGladrey LLP’s Baltimore office.
Many businesses wrongly disqualify themselves from claiming the R&D credit because of a series of myths about the activity it covers, Kaplan indicated.
“The credit gives companies conducting qualified research the ability to generate a research credit of 9 or 13 percent of research spending,” Kaplan said. “But it’s surprisingly under-claimed. If you compare IRS statistics with National Science Foundation data, it shows that somewhere between 30 percent and 40 percent of expenditures went unclaimed in 2010. Incredibly, this amounts to $3 to $4 billion in credits that could have been claimed but were not.”
There are huge spillover effects, Kaplan observed. “When a company invests in R&D and comes up with new and innovative ways to do something more efficiently, it makes the economy better for everyone. It increases the number of higher-paying jobs, not just those in that particular sector. If something can be done more efficiently, the company can compete better pricewise, and it provides the impetus for the entire sector to become more efficient and increases the standard of living for everybody.”
Kaplan noted that middle-market companies are among those least likely to take advantage of the credit. There are numerous myths associated with the credit that dissuade people from considering it, he suggested. “They believe the credit is only for companies that invent something revolutionary,” he said. “In fact, the credit is designed to encourage innovation, and is equally available to companies that attempt evolutionary improvements to existing products or processes, as well as companies that undertake revolutionary activities.”
“Or, they may believe that the research credit is only for companies engaged in basic research. However, the R&D tax credit also extends to applied science, something that many companies perform on a daily basis as they try to improve their business and production processes through the use of technology and science,” Kaplan explained.
Some other myths that inhibit the claiming of the R&D credit, according to Kaplan, are: the credit is not available for companies that fail in their research; it won’t help my company because my company is not profitable; the credit is for increasing research, and since our spending is flat, we are not eligible; and since the credit has expired, it’s too late to do anything about it now.
Kaplan has an answer for every one of these myths.
“You do not have to be successful to claim the credit— it’s an efforts-based credit,” he said. “Since the credit carries forward for 20 years and back for one year, it can benefit you if your company was profitable in the prior year, and it can be banked for use in future profitable years.”
The fact that the credit is for “increasing” research leads many to discard the notion of applying for it.
“Although the R&D credit requires an increase in research spending, current-year spending is compared to a base, which is 50 percent of the average amount spent during the previous three years, calculated under the ASC [alternative simplified credit] method. Your research spending could actually be decreasing, yet you could still be eligible for the credit,” he said.
Lastly, many dismiss the credit because it has expired. Kaplan points out that the credit has expired and been renewed 15 times since 1986, and is likely to be renewed again.
“The typical renewal has been retroactive, meaning your 2014 activity will likely qualify for the credit by tax return time,” he said. “And since the state R&D tax credits have not expired and continue based on their individual sunset provisions, staying on top of your options is beneficial.”