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R2BR&D Incentives for IndustryBY ANTONIO NANNI, PH.D., P.E., PROFESSOR AND CHAIR DEPT. OF CIVIL, ARCH. & ENVIRON. ENGINEERING,UNIVERSITY OF MIAMI, NANNI@MIAMI.EDUIn the April 2008 issue of .it, we made the case forthe importance of innovation in industry. This articleattempts to provide some guidance to companiesdoing business in the U.S. in terms of tax incentives toResearch and Development (R&D) activities.BackgroundCompanies of all sizes have been eligible for substantial taxrelief under the Federal R&D Tax Credit Program. In the taxworld, R&D is defined much more broadly than in scientificcircles. Research that qualifies companies for the Federal R&DTax Credit Program includes much more than just new productdevelopment. Expenditures to improve existing products aswell as to develop or improve processes also qualify. TheInternal Revenue Service (IRS) defines R&D expenditures asthose “incident to the development or improvement of aproduct,” including the costs and attorney’s fees associatedwith obtaining a patent. The IRS definition of “product”includes formulas, inventions, patent, pilot models,processes and techniques. Excluded expenditures includequality control testing, advertising and promotion, consumersurveys, efficiency surveys, management studies, researchfor literary, historical or similar projects, and the acquisitionof another’s patent, model, production or process. In short,much of a company’s day-to-day operation may qualify it forthis benefit.It is estimated that more than $8 billion in R&D tax credits areawarded annually to qualified companies in the U.S. Yet, IRSestimates that only a mere 20% of companies that qualityhave taken advantage of this program designed to encourageinnovation. Over the past 25 years, the R&D Tax Credit Programhas been an elusive target for many businesses. The roadblocksto claiming R&D tax credits include lack of awareness andthe time required to document a company’s eligibility. Also,many companies find it ambiguous and difficult to interpretstatutory and regulatory descriptions of the tax code. Sinceits creation in 1981, the R&D Tax Credit Program has died and.24