It’s Not Smart Playing Chicken with the Research and Development Tax Credit

Perhaps one of the least understood tax breaks available to companies that are involved in everything from investigating new patents to improving manufacturing processes have at their disposal is a little-known and often misunderstood tax credit, known as the Research and Development Tax Credit. Because this credit costs the US government millions of dollars in what would otherwise be collectible revenue, it is a political hot potato, which seems to get punted between the President and Congress on an ongoing basis. Currently, there is no law on the books for 2014 which allows for this credit. Many members of Congress want to make this tax credit part of a comprehensive overhaul of the entire tax code. In the meantime, companies both large and small are wondering what they can expect this year.

Covering a Broad Range of Activities

One of the great benefits of the Research and Development Tax Credit is that it covers a broad range of activities. Activities such as new product development, patent efforts, computer modeling, quality assurance, development of prototypes and even product improvements and the search for more efficient processes all fall into this category. The payroll cost for a wide variety of people involved in these activities is allowable. It doesn’t have to necessarily be technicians in white lab suits. It could be workers on the factory floor and even their supervisors. Currently, companies can take a credit up to 6 ½ cents for every dollar spent on these activities. While the impact on a company that is involved in these types of activities can be substantial, sometimes allowing for an after-tax profit, the cost to the government is also substantial. That is one of the reasons it remains one of the paramount legislation and congressional matters. If it is reenacted, which is highly likely, they will have to find either new sources of revenue to replace it or cut expenses somewhere in the federal budget.

New York State’s R&D Credit

With one of the lowest corporate tax rates in the Northeast, New York State has attracted its fair share of companies looking for a highly qualified workforce as well as a business friendly environment. Like many states, New York has its own formula and program to reward companies that are involved in research and development. Its formula is simple: companies get to take a 9% credit against any building or tangible personal property that meets the basic guidelines. However, in any given year, the company has to decide whether to take the R&D credit, or the alternative Investment Tax Credit. Additionally, new companies can receive a refund of any unused credit. For any company, any unused credits can be carried forward for up to 15 years.

In an effort to encourage investment in emerging technologies, New York State also offers what is known as the Qualified Emerging Technology Company Capital Credit. It rewards investors who fund companies that are forward thinking and hold the promise of breakthrough developments. There are two benchmark rates:

  • A credit of 10% for any investment that is held for a minimum of four years, up to a maximum of $150,000 per taxpayer.
  • A credit of 20% for any investment that is held for a minimum of nine years, up to a maximum credit of $300,000.
  • These credits are not refundable, but any unused portion can be carried forward indefinitely, until it is used up.
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