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News Flash: Federal Research and Development Tax Credit Extended
Through 2007
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.
Your company may qualify for research tax credits, which may provide a steady source of extra cash, if your company devotes time and resources to any of the following:
• Developing new or innovative products or processes
• Improving existing products
• Developing patents
• Developing software
• Employing design and engineering staff
• Prototyping, modeling, and trial-and-error testing
Some companies do not realize that designing and developing new or unique processes can qualify them for the Federal Research Tax Credit. Particularly in manufacturing environments, putting new equipment or technology in place can consume
huge financial resources and involve months of trial-and-error testing. The government wants to reward this kind of innovation and makes the credit available. Yet, many of these companies are missing an opportunity to improve cash flow and
save hundreds of thousands of dollars.
This month, 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.
Moss Adams has an experienced team of tax and industry professionals who assist companies in maximizing the research credits for which they are entitled. To learn more about how they may apply to your company, please contact Tom
Sanger at 800-929-3693 or
tom.sanger@mossadams.com.
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