Is Your Company Missing Out On Tax Credit Dollars?
Many small and medium-size businesses may be leaving money on the table. The reason for this could be simple - they don't realize that they may be eligible for a research and development (R&D) tax credit that could save them money.
The R&D tax credit was instituted by the federal government in 1981 to encourage U.S.-based research and development. This credit is in addition to the deduction already given for a business's R&D expenditures. Each year, Big Business saves $5 billion using this credit - which is 93 percent of the total credit received. This means that while businesses with assets of less than 10 million dollars make up more than 98 percent of the companies in the U.S., they claim only 7 percent of R&D tax credit dollars. Since the credit was designed for use by businesses of all sizes, those numbers seem puzzling. But confusion over what activities do and do not qualify for the credit has left smaller businesses and their accountants in the dark.
However, the federal government recently shed some light on the guidelines for the credit, suggesting more companies may be eligible than previously thought. A company doesn't necessarily need a scientist working in a lab with beakers and Bunsen burners to be eligible. Any new or improved product, process or software development initiative has potential for R&D tax credit qualification. In fact, many of a business's everyday operations fit into the definition of qualified R&D activities. Among other things, R&D can involve the evaluation of different manufacturing technologies and automation techniques, investigating new materials and assessing cost reduction initiatives. It can also include developing prototypes or models, applying for patents, adding new equipment and performing certification testing. The R&D tax credit is even available to companies which attempt to, but do not succeed in their efforts to innovate or improve.
Such was the case for Die-Matic Corp., a tool and die manufacturer and metal stamp producer based in Ohio. Two years ago, the company brought in INPEX® exhibitor, Black Line Group, an independent firm that focuses exclusively on providing R&D tax credit expertise to small and mid-size business owners, to do an R&D study. Among other findings, the study revealed that Die-Matic's unsuccessful design and build of an in-die tapping unit qualified for the credit. Since the initial design of the unit failed, the company had been forced to scrap it and start over. All the time and labor exhausted designing and building the new unit counted toward the credit, and so did the materials used to build it and those used for scrapped parts during trial runs. Die-Matic also discovered that the time they spent qualifying and testing welders for a new in-house welding process fit the criteria.
Another major perk of the R&D tax credit is that it is not only a dollar-for-dollar reduction against taxes currently owed, it can also be used in future tax years (up to twenty) and applied to previous years (usually the last three). This means companies can look back in time and, if a prior year's activities meet the definition of R&D, past returns may be amended to receive additional refunds. With the help of Black Line Group, Die-Matic wound up submitting amended tax returns for the years 2001 to 2004 to qualify for after-the-fact tax credits. The company hopes to gain a large tax credit or refund for those years.
For businesses like Die-Matic Corp., who are unsure which, if any, of their activities qualify for the R&D tax credit, a good place to start is with Black Line Group. Black Line Group is not an accounting firm, nor will it replace your existing CPA relationship. But because most CPA's are not R&D experts, they often don't have enough knowledge to fully utilize the credit or, in many cases, don't even know it exists. Black Line Group works with a company's accountants to do a thorough R&D study that searches out and identifies eligible activities in order to maximize the credit. The work done by Black Line Group also can help give your CPA a better understanding of the opportunity so they can apply it effectively in the future.
Initially, Black Line Group will assess a company's situation at no cost to see whether it's advisable to do an R&D tax credit study. After that, fees can be based on a percentage of the tax credit received, eliminating any up-front costs to the business. If no credits are discovered, no fee is charged.
Taking the time to discover if your company is eligible for the R&D tax credit can prove to be a worthwhile undertaking. Qualified businesses can find out they've been sitting on a refund for years without even knowing it. In addition to cash back, your company's overall effective tax rate may be lowered and market value, earnings per share and cash flow can be increased.
Don't let lack of awareness keep your small- or medium-sized business from maximizing its tax credit dollars. Find out if your company can take advantage of this cost-cutting opportunity today. For more information about the R&D tax credit and Black Line Group, call (866) 806-0476.