RTC Tax Relief Program

Congress enacted the federal Research Tax Credit (RTC) program in 1981 to provide an incentive for U.S.-based companies to develop innovative products and processes. The RTC is not a deduction; it is a dollar-for-dollar credit. Many companies of all sizes are taking advantage of the RTC and are receiving substantial amounts of refunds. This program currently provides over 7 billion dollars of annual benefits to taxpayers. And, in addition to the federal credit, many states have their own version of an RTC program.

In initially administering this program, the IRS took the position that “qualifying research” must meet a Discovery Test (DT). Under this test, research must be undertaken for the purpose of discovering information that is technological in nature. IRS interpretation of the DT coupled with other confusing and conflicting positions made it very difficult for taxpayers to claim this credit.

In 2001, the Treasury proposed regulations intended to clarify the definition of qualified research and to provide guidance in the calculation of the credit. These proposed regulations removed many restrictions in IRS interpretation of the requirements of the program. In particular, they provided a more favorable interpretation of the DT. In 2004, the DT was further softened by changes in the legislation, allowing for even more activities to qualify.

Despite these positive changes in the RTC program, the legislation is still very complex. Many companies do not take advantage of the credit, as they are unclear or unaware of its applicability to their business. Many are also unaware of the effect of the changes in the legislation.

 In general terms, a business component can be a product or a process, and can include the following:

• Manufacturing products
• Developing new, improved, or more reliable products / processes / formulas
• Developing prototypes or models (including computer generated models)
• Designing tools, jigs, molds, and dies
• Developing or applying for patents
• Performing certification testing
• Conducting testing of new concepts and technology
• Developing and introducing new technology
• Attempting the use of new materials and compounds
• Adding new equipment (labor and engineering cost aspects)
• Performing environmental testing
• Developing or improving production and/or manufacturing processes
• Developing, implementing, or upgrading systems and/or software
• Developing production control software
• Improving or building new manufacturing facilities
• Automating and/or streamlining internal processes
• Expending resources on outside consultants/contractors to do any of the above - stated activities.