Federal and state R&D credits provide a dollar-for-dollar offset against tax liability up to an average of approximately 15 percent of qualified spending, i.e., taxable wages, supply expenses, and a percentage of contract research expenses related to research that goes into developing new and improved products and processes.
R&D Tax Credits for Alternative Energy Manufacturers
Chris Bard | BDO USA LLP
How does the government’s decision to make public land available to utility-scale solar facilities encourage the few solar manufacturers left in the U.S. to produce more solar panels and to do some R&D as well?
By making land available to utility-scale solar facilities, the demand by those facilities for solar technologies should increase. Through this shift in demand additional revenue for manufacturers of photovoltaics, concentrated solar power technologies, etc. could be realized. With the additional revenue, manufacturers will be able to dedicate more dollars to improving their products and manufacturing processes.
What is the benefit of the R&D credit?
Federal and state R&D credits provide a dollar-for-dollar offset against tax liability up to an average of approximately 15 percent of qualified spending, i.e., taxable wages, supply expenses, and a percentage of contract research expenses related to research that goes into developing new and improved products and processes. More than ten states provide opportunities for companies to collect cash for their credits, whether the company is paying taxes or not. Currently, the federal R&D credit applies to expenditures paid or incurred for tax years prior to 2012.
Who’s eligible for the credit?
The credit is available to most taxpayers who make investments in an attempt to develop or improve products, manufacturing processes, software, techniques, inventions, and formulae through engineering or the physical or computer sciences.
Is there an appeals process to have other alternative energy (not included in the current list) R&D covered by the credit?
There is not an appeals process to have other alternative energy R&D costs covered by the credit. That being said, the federal R&D credit provides a benefit of 20 percent of the taxpayer’s payments or contributions to an energy research consortium for energy research when conducting business or a trade during taxable years before 2012.
Other federal tax incentives for alternative energy exist or are under congressional consideration. For example, House Democrats are pushing to renew Tax Code Section 48C’s advanced energy manufacturing credit for manufacturers of products such as solar, fuel cell, and battery technologies.
According to Rep. Mike Thompson (D-Calif.), this particular energy credit will ensure that renewable energy products like solar panel and wind turbines are manufactured in the United States. The bill would be paid for by repealing rules that allow the five major integrated oil companies to use a foreign tax credit against their U.S. tax liabilities, and it would eliminate the ability of the companies to expense their intangible drilling costs.
What does a company do to claim the R&D credit?
To claim an R&D credit for the current tax year, complete and file federal Form 6765 or the appropriate state form with a timely-filed original tax return.
Taxpayers who couldn’t use the federal credit in prior tax years—e.g., because they were in a loss position or paying alternative minimum tax instead of regular tax—can identify and report credits for up to the last 15 years on amended returns. This can make even small annual credits add up.
Are there any downsides to claiming an R&D credit?
R&D credits claimed on amended returns have been designated a “Tier One” issue by the Internal Revenue Service and, therefore, are more likely to be examined thoroughly by the IRS. When reporting or claiming R&D credits, taxpayers should make sure to have documentation on hand to enable federal and state tax examiners to determine whether, and to what extent, a company’s expenses and their activities qualify. Please consult with your tax advisor for more information about current documentation requirements.
Are you confident that the federal R&D credit will be renewed and why?
The federal R&D credit should be renewed. It was first enacted in 1981 and has since been renewed 14 times -- many times retroactively. There was only one instance where it was not re-enacted. In addition, more than 30 other countries provide incentives for R&D and R&D-related investments to help attract companies who will create high-paying, high-quality jobs. The Information Technology and Innovation Foundation estimates that the United States’ R&D credit rates 27th out of 42 countries investigated. For this and other reasons, Congress is entertaining a number of bills calling for not only the credit’s extension but also its enhancement, e.g., an increased rate from 14 percent to 20 percent.
Which states offer the most generous credits and do you envision more coming on board in the next few years?
Most states provide credits and incentives for R&D and R&D-related investments. Benefits include incentives related to R&D facilities and exemptions for R&D sales and use taxes.
In terms of the R&D credit, specifically the “Credit for Increasing Research Activities,” California offers one of the most generous broad-based credits, at a rate of 15 percent. Many other states offer this credit too, including some states that offer refundable or transferable credits i.e., credits that generate cash whether companies are paying taxes or not. Those states include, viz., in recent years, Arizona, Connecticut, Hawaii, Iowa, Louisiana, Massachusetts, Minnesota, Nebraska, New York, Virginia, West Virginia, New Jersey, and Pennsylvania. Florida and Georgia both have added credits to their R&D incentives for the 2012 tax year.
Which sectors of the alternative energy industry have used the credits the most in the past and where do you see the most promising activity for the future?
Manufacturers report the most R&D credits. In 2009, manufacturers claimed 70 percent of the almost $8 billion reported, according to IRS statistics. IRS statistics show credits by manufacturing subsector; they don’t, however, show credits by alternative energy subsector. Regardless, it can be said that alternative energy manufacturers are likely claiming most of the R&D benefits. Distributors and installers have opportunities to take advantage of R&D tax credits for investments to develop or improve distribution and installation of software and techniques.
National Leader, Tax R&D
Chairman, Global R&D Center of Excellence
For 19 years Chris has worked full time in the area of U.S. federal, state, and non-U.S. R&D tax services. He has identified more than $1 billion in R&D benefits for companies in virtually every industry and supported over 90% of those benefits on exam or at appeals.
Formerly with PricewaterhouseCoopers, LLP, Chris has designed and implemented procedures and technologies for large-, mid-, and small-cap companies to identify and document their R&D costs and activities in the most efficient and effective manner.
During this time, he has:
- Increased his clients’ R&D benefits by more than 100%, on average;
- Assisted scores of companies implement FIN 48 for R&D credits;
- Analyzed the R&D, manufacturing, software development, and other operations and documentation systems of 100s of businesses;
- Interviewed 100s of engineers, scientists, and software developers regarding their R&D and R&D-related activities;
- Worked closely with more than 100 IRS and state tax examiners, appeals officers, engineers, CAS, counsel, etc., across the U.S.;
- Designed software and procedures to optimize the process of identifying and documenting R&D activities and costs; and
- Been published in a variety of media including The Wall Street Journal, Tax Executive, Washington Business Journal, CFO.com, and others.
- California State Bar Association, since 1997
- Member The World Is Just a Book Away Foundation, since 2008, Director
- J.D., Taxation, Boalt Hall, University of California, Berkeley
- M.A., University of Illinois, University Fellow
- B.A., Georgetown University summa cum laude
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