Friday, October 01, 2010

Using R&D Tax Credits to Fund Patent Portfolio Development

The Research and Development (R&D) Tax Credit was created by Congress as part of the Economic Recovery Tax Act of 1981 to encourage U.S. industries to invest in R&D activities, and to stimulate innovation through tax incentives.  While the tax credit initially benefited Fortune 500 companies, more recent changes to the tax code have allowed almost any manufacturing or technology company to take advantage of the credit.

While the application process is quite vigorous, innovative companies have found it worth the effort: depending on the state and country, tax credits can range from 6% to 50% of qualified R&D expenditures.  To be eligible, an activity must:

  1. Have a "permitted" purpose, i.e., one in which the company is developing a new product or process;
  2. Must be "technical" in nature, i.e., involving research and development in a particular field of science;
  3. Eliminate uncertainty by attempting to overcome a technological obstacle; and
  4. Involve a process of experimentation that is geared towards eliminating the uncertainty.
Broadly speaking, U.S R&D tax credits are approximately 6% of eligible expenditures. When combined with state credits, the total credit can be increased to around 10%. The R&D tax credit earned can be offset against current, future, and past taxes paid. Most profitable companies receive a refund in installments or prior taxes paid upon filing their first R&D tax credit claim. After that, the company applies its credits against taxes it otherwise owes.

Under the product R&D credit, the term “product” includes a formula, invention, patent, pilot model, process and technique. For the purpose of the credit, R&D expenditures the IRS has stated that it “generally include all expenditures incident to the development or improvement of a product,” which includes costs of obtaining a patent, such as attorney’s fees related to the patent.

While some companies have used this credit to their advantage in IP management, many others have not.  Given that potentially significant changes will happen next year in Congress on the credit, now would be a good time as any to see how these creadits could potentially bolster your patent filing strategies (and budgets!).

See MDDI Magazine, "Uncovering Value In R&D Tax Credit Processes Through Strategic IP Management"
See also MedCity News: "Minnesota’s R&D tax credit: the best little tool you never heard of"
A medical device firm, for instance, can claim a credit for the money it pays to a contract manufacturer that makes the prototypes and the labs that tests the devices. It can also receive a credit for fees it pays to intellectual property lawyers to obtain a patent, even if they’re unsuccessful.

4 Comentários:

patent litigation said...

It's heartening to see more efforts to incentivize innovation, whether it is in the form of R&D tax credits or the USPTO's new fast-track examination options. I'd also like to hear serious discussion of Judge Michel's recent proposal to give inventors a $19k kickback on new patent filings.

Anonymous said...

I have been reading about the R&D tax credit at It seems like the credit is temporary, harshly enforced by the IRS, and has onerous qualification requirements. I would not only hope the credit is made permanent, I would hope it is easier for our companies to qualify for it. The alternative seems to be to just let our R&D be sent offshore, which is not acceptable.

Randy Eickhoff said...

Anonymous, so that you have the correct interpretation of the R&D tax credit, understand that qualifying for the credit isn't really that difficult. The challenge comes from documentation and understanding the definition of "qualified research" as it applies to the tax credit.

The IRS and state taxing authorities typically focus on whether a taxpayer has the proper documentation rather than whether the company's activities qualify. With the help of the right specialists, a system of documentation going forward can mitigate most of the issues around the credit being reduced or eliminated as a result of an IRS audit.

Unknown said...

Really enjoyed your article above and found the suggestions about tax credits to be very helpful and relevant. The fact is that many (if not most) people are looking for some way to save money when it comes to tax time but aren’t sure how get the most out tax rebates or credits. Thanks again for the information and here is a R & D Tax Credit Blog that has great information and tip so I thought I would share.


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