| Source Newsletter 2009 issue 1 |
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Get the most out of your improvement projects
The R&E tax credit was implemented in the 1981 to foster U.S. competitiveness in world markets through research, product innovations, and improvements in business and manufacturing processes.
Improvement projects in your facility, including pollution prevention and energy efficiency projects, may qualify for tax credits that can greatly affect your bottom line. The Research and Experimentation (R&E) Tax Credit, also known as the Research and Development (R&D) Tax Credit, can help offset the costs of developing or improving processes or products.
The credit was enacted to encourage innovation while providing incentives for companies investing in new products and processes. This dollar-for-dollar credit is taken in addition to normal deductions for expenses, and is awarded for certain activities that qualify as research and development.
Qualifying for the Tax Credit
Each year, the US government awards more than $8 billion to corporate taxpayers and shareholders of flow-through entities through this credit. The definition of R&D is much broader than people realize, and thus there are companies that are still missing out on this credit because they do not believe what they do is research and development. With a little guidance, many manufacturers can qualify for the tax credit. Pollution prevention and energy efficiency projects that may qualify for the tax credit could include:
- Improving your process to reduce waste
- The staff time spent testing, modifying, and enhancing new capital equipment to streamline your process or reduce your energy use
- Evaluation of using new chemicals that can potentially reduce emissions
- Researching ways to reuse water or raw materials in the process rather than discarding them as waste
- LEAN and Six Sigma projects
Taking Advantage of the Tax Credit
If your facility is doing R&E activities, but has not taken advantage of the credit, it may be time to determine if you qualify. The following four steps may help identify if your facility qualifies and will benefit from the credit.
Step 1: Evaluate What You Do
A wide range of business activities and projects can qualify for the credit, including numerous aspects of pollution prevention or energy efficiency projects. The goal of an evaluation is to develop a list of projects and determine if those projects meet the qualification criteria for the credit.
Step 2: Assess Potential Expenditures
The second step is to assess the potential expenditures for qualifying projects and the documentation you have to support your claim. These costs include internal labor such as direct research, direct supervision of research, direct support of research, supply costs, and external labor.
Step 3: Quantify Qualifying Activities
What is valuable to your company may be meaningless to another company. You must determine if your qualifying activities would produce a meaningful tax credit. Companies with revenues of as little as $2 million may be able to generate a meaningful tax credit.
Step 4: File for the Tax Credit
If you have passed through the first three steps, it is time to fill out the tax credit form, calculate your credit, and, if appropriate, amend prior tax returns to claim credits from past years. Typically, you can file amended tax returns for the past three years.
Getting the Help You Need
To apply for the R&E tax credit, it is critical that you work with someone with experience in the credit. Recent IRS audit guidelines emphasize the importance of solid documentation. If your accountant does not have this experience, find a specialist who does. A specialist will help catch you up from past years and put a methodology in place for the future. You will want to involve your accountant in the process to help continue your R&E methodology in the future.
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Get the Most out of your improvement projects
- R&E Case Study: Crystal Cabinet Works
-R&E Case Study: Stern Industries
Awards recognize pollution prevention efforts
Energy conservation opportunities available to chemical manufacturers and metal casters
-Centerpoint offers rebate program
Seven companies to host MnTAP interns
Materials Exchange
Calendar of Events
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