The R&E Tax Credit enables laboratories to receive a refund and/or credit for the time they spend on research and experimentation. While it's applicable to all labs, the R&E Tax Credit is especially good news for million-dollar-plus laboratories that might derive the most financial benefit.
If your laboratory is taking advantage of the rapidly changing technology in our industry by experimenting with new products, adding new equipment or streamlining internal processes, you could qualify for the Research & Experimentation (R&E) Tax Credit click here for specific activities that apply. Simply put, you can 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.
Started in 1981, the R&E Tax Credit offers incentives for risk-taking companies to invest resources in innovation and improvements that help expand the U.S. economy. In 2001, several of the qualifying regulations were eased, making the credit applicable to a much wider audience--including dental laboratories. This is a Federal program; however, over 30 states offer R&E credits as well. It's also applicable to Canadian laboratories, although on a more limited basis.
It's a wage-based credit, meaning it's determined by quantifying each staff member's time spent on research and experimental activities and multiplying by his wages. The credit is retroactive, so the time you spent on R&E in the past three or four years is applicable (the eligibility period depends on your lab's fiscal year end and when you filed your 2002 tax return).
Calculating the credit using Form 6765 is complex and since the tax benefits can be substantial, the IRS often scrutinizes the forms, so proper documentation and working with a reputable accounting firm is essential. The potential financial benefit depends upon the size of your laboratory, with larger labs typically deriving a greater benefit. For instance, if a lab's gross revenue is between one and five million dollars, it could receive a credit between $75,000 and $200,000.
"This is a tax-free, dollar-for-dollar credit that can be used to offset past and future income taxes," explains Adam Herman, CPA/ABV, CVA, ASA, from MPP&W, a CPA and business advisory firm in St. Louis. For example, if a laboratory is entitled to a $100,000 R&E credit over a three-year period and it paid $70,000 in taxes during those three years, it would receive a $70,000 refund with interest and be able to carry forward the remaining $30,000 as a credit toward future taxes. "To date, we've worked with over 40 dental laboratories and generated a total of over $8 million in R&E tax credits for our laboratory customers," says Herman, whose percentage-based fee is contingent on the laboratory receiving credits or a refund.
Keller Laboratories, headquartered in Fenton, Missouri, was MPP&W's first laboratory customer. "We received credits for implementing several new processes and techniques, such as IPS Empress Esthetic, Wol-Ceram, new denture techniques, new porcelain systems, the Lava CAD/CAM system, investments and the G-Base articulator. In addition, we also received the credit for activities related to implementing Lean Manufacturing, such as developing time studies, identifying processes, training, standardizing work stations, organizing tools and suppliers, and fees paid to our outside consultant," explains Larry Weiss, chief financial officer.
According to Weiss, the process was fairly simple. The lab spent a few hours gathering information for MPP&W, including previously filed tax returns, W-2's, an organizational chart and some marketing material. Then, MPP&W staff members spent two days at the laboratory interviewing the management team about the implementation, testing and experimentation of new processes and techniques. "They focused on the various challenges and hurdles that we had to overcome in our research and experimentation. They were very considerate of our time and used interview sheets designed specifically to gather the information necessary to complete a very thorough report," says Weiss.
About a month later, the lab received a draft of MPP&W's report explaining all of Keller's qualifying activities and the detailed calculation for the credit. After a few modifications, MPP&W delivered the final report and amended tax returns a week later. "We received our refund about 90 days later," says Weiss. "Overall, the process required a minimal amount of time and work on our part."