THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Monday, July 18, 1994 TAG: 9407160152
SECTION: BUSINESS WEEKLY PAGE: 7 EDITION: FINAL
SOURCE: Stephen Halliday
LENGTH: Medium: 67 lines
What do most successful biotech, telecommunications, pharmaceutical, defense contracting, utility and industrial companies have in common?
Each year, they spend large sums on research and experimental activities to improve their products. And many of these companies do not claim the maximum amount of R&E tax credit that they are entitled to.
The tax code continues to provide incentives for companies to engage in productive research activities. The recent tax law retroactively extended the R&E tax credit through June 30, 1995.
Also, the law makes it easier for start-up companies to qualify for the credit.
Though a permanent authorization of the credit would be useful to companies making long-range research plans, a limited extension is certainly more helpful than no credit at all.
Businesses should act now to make sure they can claim the credit for qualified expenses paid or incurred before the end of June 1995.
What should companies do to ensure that they maximize their R&E credit? Consider a study to identify all qualifying expenses, as well as to prepare for potential IRS examinations.
Such a study involves coordinating a company's engineering, marketing, accounting and tax departments. Managers will work with company personnel to identify the types of expenses that generate the tax credit.
The current credit is equal to 20 percent of the amount that a company's qualified research expenditures for the year exceed the base amount for that year. Qualified costs must be experimental or laboratory in nature, intended to discover information that would eliminate uncertainty over developing or improving a product.
The costs must meet additional tests. Research must be technological, using principles of the physical, biological, engineering or computer sciences. They must be applied in the development of a new or improved business component.
Under the IRS' proposed regulations that define R&E, the research activities must seek to create or improve a product's performance, reliability or quality.
What doesn't qualify for the credit? Ordinary testing or inspection, research to modify or duplicate current components, or research conducted in the fields of social sciences, arts or humanities.
The IRS' proposed regulations also specifically exclude quality-control activities, efficiency surveys, management studies, consumer surveys, advertising and promotion or the acquisition of someone else's patent or technology.
Future prospects for the tax credit remain promising. If the federal government did not need additional sources of revenue, the tax credit might have been made permanent a long time ago.
The Clinton administration cites the credit as an example of tax policy that promotes economic growth and security. Though it favors the credit, the administration is limited by ongoing revenue constraints.
Still, it is quite possible that the credit will continue to be extended in fits and starts in the not too distant future. MEMO: In Business provides advice for small and mid-sized businesses and is
written by local professionals.
Stephen Halliday is managing partner of Coopers & Lybrand, CPAs, in
Norfolk and Newport News.
by CNB