This Holiday Season, a Gift in the Form of R&D Tax Credits
In 2011, U.S. businesses reported more than $12 billion in federal and state tax credits for their investments in attempts to develop or improve products, processes and software.
Contrary to popular belief, companies don’t have to be in the pharma or tech industry to qualify for research and development (R&D) tax credits. Retailers across industries stand to benefit significantly from recent events that have made the credit even more attractive.
First, to qualify for the credit, activities must meet these four tests:
- Permitted Purpose Test: activities must be intended to develop or improve the functionality, performance, reliability or quantity of a product, manufacturing process, software, invention, technique, or formula. Importantly, the activity does not have to be successful to qualify.
- Process of Experimentation Test: activities must be designed to evaluate one or more alternatives to achieve a result.
- Technological in Nature Test: activities must fundamentally rely on the principles of engineering or the physical, biological or computer sciences.
- Uncertainty Test: activities must attempt to eliminate uncertainty regarding how to develop or improve the component or the component’s appropriate design.
Retail and consumer product companies perform these kinds of activities every day. For example, attempting to develop or improve the following can qualify if the four-part test above is met:
- Leather and other fabrics;
- Construction techniques;
- Structural integrity of fabric or materials;
- Colorfastness and tensile strength;
- Weaving techniques;
- Material usage;
- Manufacturing processes generally;
- Weather resistance;
- Comfort and joint cushioning for footwear;
- Software to improve warehouse management, customer service, distribution centers, supply chain management, etc.; and
- Ecological footprint. Many “green” or environmentally conscious activities, like the creation of second generation products, can qualify.
Even though some market research activities—like surveys and focus groups—may have a fundamental impact on the end result, these activities do not qualify, nor do activities performed outside the United States or funded by unrelated third parties.
Recent developments, though, have made claiming R&D credits even more attractive.
For example, the U.S. Tax Court rejected the higher standards the IRS often applies to determine whether an activity qualifies, allowing high percentages of time for the CEO and quality assurance employees (seeSuder v. Commissioner
, Oct. 1, 2014). And Treasury Regulations published in June now allow companies for the first time to claim the Alternative Simplified Credit (ASC) on amended returns, enabling many companies to more than double their credits.
For companies actively engaging in any of the activities mentioned above, there is no time like the present to claim and benefit from R&D tax credits.