In the fall, Congress extended the Research and Experimentation Tax Credit Program through 2011. Some key changes to the program may make it more advantageous for laboratories.
Is your laboratory testing a new porcelain or alloy, adding new processes related to high-tech equipment, experimenting with a new technique or streamlining your production processes? If so, you could qualify for the Research and Experimentation Tax Credit (R&E Credit) and receive a credit of up to 20% of the cost of your research and experimentation activities--including the costs of labor--over a calculated base amount depending on your qualified activities in the past. (See Do You Qualify? for a list of some qualifying research and experimentation activities.)
Implemented in 1981, the R&E Credit is a general business tax credit designed to reward companies for investing in innovation with the ultimate goal of stimulating the economy. The credit is related to three categories: wages; supplies used during research; and contract labor (using an outside facility for testing). Wages are the biggest source of credit for laboratories because staff members' time spent experimenting and researching qualifies.
The credit may be applied retroactively, so the time you spent on research and experimentation in the past three or four years is applicable; the eligibility period depends on your laboratory's fiscal year end and when you filed your 2007 tax return. The potential financial benefit depends on the size of your laboratory and the amount of research and experimentation you're doing. For instance, if a lab's gross revenue is between $2 and $5 million and it's spending 10% to 20% of its labor costs on research and experimentation activities, it could receive a credit of between $50,000 and $200,000 over a three- to four-year period.
"Some laboratory owners think the R&E Credit won't apply to them but that's a misconception. So much of what laboratories do every day is applicable--and not just on successful projects; failures count too. If, for example, you spend a month systematically testing a new porcelain with different substructures, the time you spent researching, experimenting and testing, regardless of the level of success of that project, may qualify for the credit," says Adam Herman, CPA/ABV, CVA, ASA, Mueller Prost PC, a CPA and business advisory firm in St. Louis that has helped over 100 laboratories obtain more than $15 million in credits.
Changes to R&E
Last fall, in addition to extending the R&E Credit program through 2011, Congress passed the Small Business Jobs Act that enables businesses to use the R&E Credit to offset the Alternative Minimum Tax (AMT), which taxpayers were not previously able to do. This change is only applicable in 2010 and to businesses with average gross receipts from the previous three years of $50 million or less.
"Laboratories that may not have been able to take advantage of the R&E Credit in the past should take another look to see whether this change can help lower their tax burden," says Doug Kolker, CPA, also with Mueller Prost PC. "C-corporations and flow-through entities such as S-corporations, LLCs and partnerships are taking advantage of the R&E Credit for 2010. In addition, over 30 states offer a state research credit as well."
Several years ago, Congress added the Alternative Simplified Credit (ASC) to the R&E Credit Program in order to simplify the calculation process. Prior to this change, laboratories had to collect information from as long as 20 years ago to support their credit claim. Now, the easier ASC uses 50% of the average of the three previous years' of qualified expenditures as the base amount that must be exceeded to receive the credit. The ASC can only be elected on an originally filed return, not on an amended return.
Calculating the credit is complex and, since the tax benefits can be substantial, the IRS often scrutinizes the forms. Therefore, proper documentation--including previously filed tax returns, W-2's, an organizational chart, research notes, technician logs--and working with a reputable accounting firm that specializes in R&E Credits are essential.
Mueller Prost PC has an R&E Tax Credit Group that specializes in assisting laboratories claim the R&E Credit. It offers a five-phase process: an initial meeting, preliminary assessment, documentation and supplemental interviews, calculation and substantiation of the credit, and planning for the future. There is no charge for the first two phases; the cost for the last three phases is on a fixed-fee basis.
Do You Qualify?
If your laboratory is doing any of the following, you could qualify for the Research and Experimentation Tax Credit (R&E Credit) and receive a credit of up to 20% of the cost of your research and experimentation activities--including the costs of labor--over a calculated base amount:
- Experimenting with the latest in pressing, implant, laser welding or CAD/CAM technologies.
- Researching different substructure materials for various applications.
- Testing new porcelains, composites, acrylics or other materials.
- Experimenting with alternate alloys.
- Testing restorations for fit, marginal integrity or strength.
- Developing or improving new techniques and formulas.
- Experimenting with new ways to increase productivity.
- Developing new processes in relation to lab equipment.
- Developing new products or techniques that improve patient comfort and reduce chairtime.
- Streamlining your production and internal process to improve quality and productivity.