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Using R&D Tax Credits to Fund Patent Portfolio Development

By Peter Zura

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.

Full post as published by Two-Seventy-One Patent Blog on October 01, 2010 (boomark / email).