At first glance, the Research & Development tax credits available to businesses located in New York State may seem only to apply to those that employ people wearing white lab coats.  But a more thorough look at these tax incentives reveals that many businesses outside the high-tech industries do qualify for these lucrative tax breaks.  Businesses in the Engineering Services, Manufacturing, Retail, Software, and Financial Services Industries, just to name a few, have all benefited from these tax incentives.

 

In general, to qualify for these credits, research must be undertaken for the purpose of discovering information that is technological in nature and its application is intended to be useful in the development of a new or improved business component.  This means a business may be eligible for an R&D credit if it attempts to develop or improve any of the following:  (1) Products, (2) Processes e.g. manufacturing processes, (3) Software – for sale or for internal use, (4) Techniques, or (5) Inventions.  

 

The Federal R&D credit is generally equal to 20% of “qualifying research expenses” over a fixed base amount, which is determined by a company’s average gross revenues over the prior four years.  However, many companies that perform qualifying R&D have not benefited in the past from this incentive because the sum of their “qualifying research expenses” did not exceed the fixed base amount due to their high average gross revenues.  To help bypass this limitation, in 2007, Congress created the Alternative Simplified Credit.  Rather than the amount of the credit being tied to the company’s prior gross revenues, a company may calculate the credit by multiplying the “qualifying research expenses” that exceed 50% of the average “qualified research expenses” for the prior three years by 12%.     

 

What qualifies as a research expense for purposes of this credit?  In general, (1) wages paid to employees while performing R&D activities, (2) supplies used in the conduct of qualified research, (3) amounts paid to others for the use of computers in the conduct of qualified research, and (4) contract research expenses paid to Universities or other scientific research organization are qualifying expenses.

 

While this non refundable Federal credit expired on December 31, 2007, legislation has recently been introduced in Congress not only to extend this tax incentive, but also to improve it by increasing the simplified credit to 14% this year and 16% next year, as well as by making it permanent.

 

In addition to the Federal credit, businesses may be eligible to claim New York State’s (NYS) version of the R&D tax credit.  These credits, known as the Qualified Emerging Technology Company (QETC) tax credits, are composed of a handful of different credits.

 

The most significant of these is the QETC Facilities, Operations, and Training Credits.  To qualify, a business must be primarily located and conduct R&D activities in NYS, employ no more than 100 people with 75% of those in NYS, have gross revenues of $10 million or less, and incur R&D expenses of at least 6% of gross revenues for the respective year. 

 

If a business can clear these hurdles, it may be eligible to claim a credit equal to (1) 18% of the R&D property purchased during the year, (2) 9% of the qualified research expenses paid or incurred during the year, and (3) 100% of qualified high-technology training expenses, limited to $4,000 per employee per year.

 

What qualifies as research expenses for the NYS credit is similar to that which qualifies for the Federal credit.  However a few significant differences exist.  First, overhead expenses such as utilities, maintenance, property taxes and other expenses that support the R&D function are included in the NYS credit calculation while excluded from the federal.  Second, the NYS credit is refundable, which results in money in the company’s pocket even if it had no taxable income for the year.  Third, these NYS QETC credits may be taken only for four consecutive years, with the amount of the credit not to exceed $250,000 per year.    

 

Another NYS credit is the QETC Employment Credit.  To qualify for this credit, businesses must meet many of the same criteria mentioned above, including having qualifying R&D expenses that meet a particular threshold.  If these are met, a business is eligible for a $1,000 credit for each full-time employee over a base amount (the average number of full-time employees for the three years immediately preceding the first year this credit is taken).  This credit obviously rewards a growing business, however, unlike the QETC Facilities, Operations, and Training Credits, this credit can be taken for only three consecutive years and is not refundable.

 

The last NYS R&D credit is the QETC Capital Tax Credit.  Investors, not the businesses, receive a credit equal to 10% of their qualifying investment (e.g. purchase of original issue stock or a contribution to the business in exchange for an ownership interest) in a QETC business if the investors certify to NYS that they will hold the investment for four years.  If the investors certify to hold for nine years, the credit is increased to 20%. 

 

To be eligible for this credit, the business must be certified as a QETC business by NYS.  To do this, a business must submit an application with NYS stating that it is a NYS business with gross revenues of $10 million or less, and its primary products are classified as “emerging technologies” or its R&D activities meet a certain expense threshold.

 

As you can see, New York State and the Federal government have put numerous incentives in place for businesses to enhance their R&D efforts.  It is important for businesses to take advantage of these programs to help create efficiencies and become more competitive in the marketplace.  Don’t be caught leaving money on the table, because chances are your competitors are not.              

 

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