Federal Tax Credit for R&D

The Federal Research Tax Credit is an often underutilized tax saving opportunity for companies which participate in qualifying research activities. The credit reduces a qualifying company's federal income tax burden offering them significant tax savings. Unlike tax deductions, which reduce taxes indirectly by lowering taxable income, a credit offers a direct dollar-for-dollar tax reduction.

Companies in the manufacturing industry perform work that frequently qualifies for significant research tax credits. Many of these manufacturers do not realize that their day-to-day work qualifies their company for the benefit of the credit.

In December 2006, Congress renewed the Research Tax Credit, extending it to December 31, 2007 from its previous expiration date of December 31, 2005. This most recent extension offers several new opportunities for companies to qualify and reduce their tax burden. For companies that are already using the credit, the extension provides two more years during which certain expenses may qualify. For companies that are not yet taking advantage of the credit, now is an excellent time to explore the potential savings for 2006, as well as possible qualifying expenses from up to four previous years.

In addition to extending the existing R&D credit, Congress added several new provisions. Beginning January 1, 2007, there will be three credit calculation methods, including a new option called the Alternative Simplified Credit (ASC). This new calculation method is based on qualified research expenses lacking a gross receipts factor. It offers possible benefits for companies not otherwise able to utilize the credit under the previous structure.