Your company may be engaged in research and development and you may not be aware. Even companies that are not technically focused can be eligible to receive research and development (R&D) tax credits from the federal government.

R&D credits are given to companies that struggle to improve the product or the process used to make that product by developing new methods currently not found in the public domain. The solutions must not be obvious and must involve experimentation.

Despite the positive effects of these credits on the U.S. economy, they must continue to be authorized by Congress on a regular basis. In fact, prior to 1999 and throughout the 1980s and '90s, the tax credits had to be resuscitated every year.

"Particularly during 1995-96, the Republicans, Democrats and Clinton Administration all fought over these credits even though they all liked them," says Nigel Harvey, managing director of CCR Cost Recovery Services LLC (formerly The Empyrean Group LLC), an affiliate of Leading Edge accounting firm Carlin, Charron & Rosen.

The good news is that the current state of R&D tax credits is fairly stable. Originally enacted in 1981 to provide an incentive for U.S. companies to increase R&D spending, the current credits have a sunset date of June 30, 2004. Companies now can go back three years to claim credits. Businesses that took an extension in September 2000 have until September 2003 to claim those credits and there's a bit of a scramble to get those reports in to the IRS.

"R&D is a popular credit. Both houses of Congress like it and I would hope that a modified form will be approved by Congress before the June 2004 sunset date," says Harvey.

Current regulations state that the federal credits pay 20 percent of research and development costs above a certain base. You get the credit for the increase, but how the increase is defined varies from year to year.

The base cannot be less than half the amount of research and development. "It'd be much simpler if the government said, 'We'll pay 10 percent,' " says Harvey.

States also have R&D tax credits, but those credits vary widely. For example, New York does not offer any credits; California offers credit similar to the federal government; and Massachusetts offers 50 percent of what the federal government provides.

"What's important to note is that research and development activity can take place anywhere in an organization and with the assistance of people from any department," says Harvey.

Working with a technology consulting firm can help a company identify all eligible R&D activity. "The money spent on a technology service will pay for itself many times over in the form of tax credits," adds Harvey.

For example, a company that repairs books developed a system that allows it to take out the bad page, reinsert a new page and only cost them $2 per book to make that change. "This $10 million book repair company was able to get $100,000 in R&D tax credits for improving this process," says Harvey.

Harvey shared a number of other examples with the Leading Edge tax managers at their June conference in Chicago:

• $2 million medical device manufacturer received credits of $150,000 over three years
• $15 million manufacturer of carpets comprised of natural materials received $50,000 in credits
• $35 million manufacturer of uniforms received $400,000 in credits
• $25 million injection molding company received $325,000

"What we do is crawl around to uncover the R&D, identify and write about the activity in such a way that tugs at the heartstrings of the IRS's definition of R&D," says Harvey.

An engineer and physicist by training, Harvey and his partners are all adept at identifying R&D and opportunities for tax savings. "Everything has its own technology and we've found savings for companies ranging from those growing mushrooms and making booze to manufacturing jet engines," he says. e

For more information on the federal R&D tax credit guidelines, visit www.irs.ustreas.gov.