Don’t Leave Money on the Table
By Scott Schmidt

With Congress’ recent passage of the Tax Relief and Health Care Act of 2006, the Research & Development (R&D) tax credit was extended retroactive to the beginning of 2006 through 2007. If you haven’t heard of this credit, read on. Your company just might be leaving money on the table. 

What is the R&D tax credit?
Created over 25 years ago, the R&D tax credit was designed to encourage innovation on American soil. Every year, it provides billions of dollars to companies who perform domestic R&D activities. 

If your company performs activities that meet the very broad definition of “R&D,” your business may be able to generate R&D tax credits for the current and prior years. 

You could then apply them toward current and past tax liabilities to create immediate and substantial amounts of cash. In many cases, a business’ savings can be $100,000 or more. 

Most large companies already take advantage of this credit. But small and midsized businesses—like many of the ones in O&P—rarely do. Because interpreting and applying the rules around the tax credit is such a specialty, many CPA firms lack the in-house expertise to help their clients take full advantage of it. 

Many of the daily activities performed by an O&P company meet the credit’s definition of R&D. 

For example, in addition to new product development, improvements to existing products, process enhancements and cost reductions often qualify, though most business owners don’t consider these activities as R&D. With the recent clarifications to the tax credit rules, it is now easier for smaller companies to qualify. 

Two O&P examples
One example of an AOPA company performing R&D is Texas Assistive Devices, located in Brazoria, Tex. The company’s original invention, the N-Abler, obviously required research and development activities that would qualify for a R&D tax credit. 

But the creation of this new product is not the only way Texas Assistive Devices could qualify for the R&D credit. Improvements to existing products are also activities that make the grade. 

For example, when one particular product exhibited wear and tear after use, the company started evaluating ways to improve it. 

Johnnie Rouse, engineering consultant for Texas Assistive Devices, helped create and implement these improvements. 

“One of the changes was on the locking device,” said Rouse. “We put a screw in there so that if it starts getting too much slack, the end user can tighten that back up. We considered a toggle or putting in replaceable sleeves, but most of those alternatives started getting cost heavy.”

By evaluating alternatives and making improvements to their existing product, Texas Assistive Devices is performing activities that would qualify for the R&D tax credit. 

“If [the credit is] available,” said Rouse, “I certainly think that anybody in any company should take full advantage of it. I am a firm believer that you should pay the taxes that you owe, but you shouldn’t pay one penny more than you have to.” 

Another example of an O&P company performing qualifying R&D tax credit activities is Ortho Innovations. Based in Rochester, Minn., Ortho Innovations uses their expertise in clinical orthotics and prosthetics to develop patient care products related to orthopedic and rehabilitative medicine. 

While Ortho Innovations often asks a third-party design firm to do some of this work, this activity may still qualify for the R&D tax credit. The design firm charged Ortho Innovations on a time and materials basis, which placed the activity’s risk upon Ortho Innovations. 

“We commonly pay our designers for time and materials,” says Rick Miller, director of education and marketing. “Any time there is an increase in those costs, due to complications or complexity, we are picking up those costs.” 

Many companies are unaware that these costs may be included in their tax credit claim, but there are a large number of these types of costs that qualify as research expenditures for the R&D tax credit. 

“If you give me the option of spending money on taxes or spending money on product and process improvement, [I’ll do the latter.]” says Miller. “If I can have one offset the other, that adds to the bottom line.” 

However, there are tests that must be met in order to qualify for the R&D tax credit. Understanding and interpreting those requirements and determining the expenditures associated with these activities are critical to claiming the R&D credit. Some firms specialize in helping companies go through this process. 

If your company is undertaking activities that will position itself as a leader in the O&P industry, the R&D tax credit is an opportunity for you. Through the successful identification and accumulation of daily costs, you can generate cash flow for your company and secure your tomorrow by exploring the R&D tax credit today. 

Scott Schmidt is a principal with Black Line Group, a firm that specializes solely in the R&D tax credit.
Black Line Group ascertains a company’s qualifying R&D activities, helps them decipher the legislation, and educates them on record keeping and application. Contact Black Line Group at (763) 550-0111 or visit their Web site at www.blacklinegrp.com.