To Your Credit

On Again, Off Again

It's not difficult to understand why the R&D tax credit has often been ignored by small business. For one thing, it has been killed off and reborn more times than Frankenstein on the big screen-six times since 1981. Every couple of years Congress allows it to expire, then revives it-for two to three years at a time-typically with credits approved retroactively for the hiatus.

"[The credit] has always been confusing and tough to obtain," says Carolyn Turnbull, associate partner with accounting firm Postlethwaite & Netterville in Baton Rouge, Louisiana, and a member of the Shareholders and Corporations Committee of the American Institute of Certified Public Accountants. "Even when it was renewed or extended, few people knew it was retroactive."

When the IRS last revived the R&D tax credit two years ago, few people bothered to take note. "Who reads IRS regulations?" says Mackles.

Even now, the R&D credit is on hiatus; it expired June 30, 1995. But don't let that stop you from taking unrealized R&D tax credits from past years or from keeping proper records while you await yet another miraculous revival. Already, bills have been introduced to bring the credit back.

"There's a good deal more clarity now about what qualifies, and anybody who takes a second look will find a great deal of benefit," Mackles says. "Because of the cost-cutting moves forced on companies right now, lots of money is being spent on finding cheaper, smarter, faster ways to make existing products or deliver services."

While a simple definition of precisely what expenses qualify for the R&D credit remains somewhat elusive, Mackles says, "About 95 percent of what qualifies are wages. Eligible salaries apply toward the credit on a prorated basis, and once 80 percent of an employee's time is devoted to R&D activities, you can deduct 100 percent of his or her salary." Although it's harder to do, you can also make a case that supplies used in the effort qualify as expenses; you can't, however, consider rent or other fixed costs qualified expenses. Explains Mackles, "Bricks and mortar don't count, but supplies that get used up do."

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This article was originally published in the July 1996 print edition of Entrepreneur with the headline: To Your Credit.

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