Summer 2007

Manufacturing/Distribution Advisor

Can You Claim a Research Tax Credit?

Look at your business over the last few years. Have you added product lines, grown your plant or automated processes? If so, you may qualify for the research and experimentation (R&E) tax credit.

The qualifications for this incentive have been relaxed, and a broader range of companies and activities are eligible. Before 2003, the R&E credit was available only for developing an entirely new process, but now process improvements qualify. More than a third of the firms that claim the credit today have revenues of less than $10 million, and two-thirds of the claimants are manufacturers.

This incentive to innovate was established by Congress in 1981 as the research and development (R&D) credit, and has been repeatedly extended. It's retroactive, so companies can claim their work from prior years.

Companies claim the R&E credit for a range of activities, including:

• Developing new or improved products or prototypes,
• Holding trade secrets or proprietary information,
• Modifying production processes,
• Employing or contracting technical personnel,
• Evaluating new materials or components,
• Designing new facilities, and
• Automating processes or developing software.

To qualify for the R&E credit, a research activity must meet several criteria:

1. It must create a new or improved product or process. The result of the claimed activity, if not brand new, must add new functionality or quality.
2. It must be technological. White coats in a lab aren't required, but the research must be governed by principles of physical, biological, engineering, or computer science.
3. It must aim to eliminate uncertainty. The research must seek information that is currently unknown, whether the project succeeds or not.
4. It must involve experimentation. Claimed activities must adhere to a scientific process, which includes hypothesis and testing to eliminate alternatives.
5. Finally, software for internal use must be unavailable commercially, meet a stiff test for innovation, and involve significant economic risk.

If you'd like to explore the research and experimentation tax credit, please contact Jim Bowen, Tax Partner, at 330-255-2461 or Leif Erickson, Tax Manager, at 330-255-2493.

Editor's Note: Bober, Markey, Fedorovich & Company frequently works with clients on matters such as this. Please call your partner / manager contact if you would like assistance in this area.

Manufacturing/Distribution Advisor is produced quarterly by Bober, Markey, Fedorovich & Company's Manufacturing/Distribution Services Team. If you would like additional information about the services that we can provide to manufacturers and wholesale distributors, please call or email our team leader, James E. Merklin, CPA, M.Acc. at (330) 762-9785 or jimm@bobermarkey.com.

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