The Underappreciated Value of Research and Development Tax Credits

Since 1981, the government has made an effort to subsidize innovation in business through providing a Research and Development (“R&D”) tax credit. In spite of their often-invaluable benefits, R&D tax credits are a resource that has long been ignored by companies in many sectors.

I recently met with Carey Cadle, partner at the accounting firm Gallina LLP, who explained why R&D Tax Credits often slide under the radar. According to Cadle, it’s all about perception. Up until 2003, the strict requirements for attaining credits made it difficult for most companies outside the Fortune 500 to receive any benefit. But over the past six years, the rules have changed so that the credit would no longer be limited to work that was truly groundbreaking, making it easier for small to mid-sized business to also gain from the federal program. And, for these smaller businesses, gains from R&D credits are potentially even greater, as the credits represent a much higher percentage of their assets.

To receive credits, businesses need not necessarily develop a patent. They can also be compensated for streamlining internal processes or attempting to use more efficient materials. Cadle stated: “Developing an improved process is all you need, making what you do better faster cheaper … any design work is also qualified.” As such, Cadle explained, “many of the day-to-day activities of employees are product or process improvements, and a significant portion of their salaries can be recaptured.” In fact, he says, 90% of what Gallina captures in credits comes from employee wages—salaries of employees, even executives, who operate the firm’s R & D efforts. Credits can also go toward encouraging outside consultants to make business more efficient. Even patent work conducted by an outside attorney counts. It’s refundable up to 13 cents on the dollar.

Smaller businesses would be certainly doing themselves a favor to become a little more educated about R&D tax credits. For Gallina, the average tax credit is $250,000. Some businesses have savings upwards of several million dollars. To get the ball rolling, all that’s necessary is an organizational chart, a list of employees working on the development project, and a copy of a tax return. Far from the days of arduous forms and strict requirements, it might be time for businesses to change the way they look at R&D.