In many countries, including the U.S., companies that develop technology can get a tax credit for their inventions. These credits can help offset R&D budgets and save on taxes.

In the U.S. the tax credits were introduced in 1981 during Ronald Reagan’s administration to trigger innovation in the automobile industry because of intense competition from Japanese car manufacturers, according to Jonathan Forman, principal and managing director of BDO International’s Global R&D Center of Excellence. Over time they have evolved to include any company that specializes in technological development.

Yet not many companies are taking them, and the energy industry seems particularly underrepresented. Forman travels the country giving talks about the credits and said that many companies aren’t claiming the credits because they don’t think they’re eligible.

Eligibility

In fact, eligibility is the easy part of the equation. “Anything that leads to development or improvement is eligible,” Forman said. “It doesn’t have to be earth-shattering; it can be incremental.”

He added that some states offer credits as well.

At the federal level, “qualified research” is characterized by several factors. A “permitted purpose test” attempts to develop or improve the functionality, performance, reliability or quality of a business component, which is defined as a product, process, software, technique, invention or formula. These are either held for sale, lease or license or used by the company in one of its trades or businesses.

The “process of experimentation test” indicates that 80% or more of the activities must comprise a process of experimentation, for example, a process designed to evaluate at least one alternative to achieve a result. In this case, these tests must fundamentally rely on the principles of engineering or the physical, biological or computer sciences and indicate that the method of achieving that result is uncertain at the beginning of the research.

Forman provided several qualified research examples, including:

  • Basic R&D;
  • Product development;
  • Manufacturing process improvements;
  • Software development, whether it is for sale, license or internal use;
  • Evaluation of a third-party’s technology to perform within an existing production process;
  • Scale-up activities to resolve engineering uncertainties not easily eliminated through smaller processes or equipment;
  • Specification and integration of existing components into an overall design for a new system; and
  • Additional design and engineering to modify molds purchased from third parties to produce desired components.

Activities that are not eligible include those that are related to style; are not “technological in nature;” are funded by an unrelated person or governmental entity; have been conducted outside the U.S.; involve non-technical surveys and market research; involve routine data collection; involve software development for internal use (some exceptions exist); or are activities that have taken place after commercial production, that involve adapting existing components to a particular customer’s requirements or that duplicate an existing business component.

Historically, the credit has to be reinstated by Congress, and the most recent credits expired at the end of 2014. Forman said that every president and presidential candidate has been in favor of making the credits permanent, but because of the unanimity of this belief, the bill often gets tacked onto a more controversial bill that is likely to be vetoed. And there’s also the cost issue.

“It would cost $165 billion to make it permanent,” Forman said.

Problems With Credits

One of the other factors that may cause companies to shy away from claiming the credits is the paperwork. While no technical information is required to be submitted in the U.S. (this varies from country to country), other types of record-keeping are critical.

There are two methods of taking the credit. The regular version is likely to net about 6.5% credit; the simplified version will net 4.5% to 6%. The regular version requires companies that started before Jan. 1, 1984, to submit qualified costs and receipts from 1984 to 1988. Companies that started on Jan. 1, 1984 or later are considered “start-ups.”

“This can be difficult with the expiration/renewal cycles,” Forman said. Not to mention mergers and acquisitions.

The simplified credit requires spending in one year compared to a three-year rolling average, which prevents many newer companies from using this method.

Still, many companies could be availing themselves of these credits but simply are unaware of the process. “It’s an education process,” Forman said. “I try to speak at conferences and get it in front of the industry associations. I’m getting the word out to the technical people who do this every day.”

Contact the author, Rhonda Duey, at rduey@hartenergy.com.