R&D tax credit lets the good ideas roll

The federal tax credit for companies that invest in R&D was renewed in December for 2006 and 2007. The tax break, known as the Research and Experimentation Tax Credit, also gained a new feature that should help more growing businesses take advantage of it--and save some serious money, says Entrepreneur.

The research credit is intended to spur innovation, which has worked for Bryan Wood, owner of 43-year-old Powr-Grip Co. Inc. in Laurel, Montana. The company, which manufactures vacuum-powered lifting tools, has been taking the credit since 2001.

Last year, nearly 15 percent of Powr-Grip's $12 million in sales came from products that didn't exist two years earlier, says Wood, 41. In 2006, Powr-Grip's credit came to $34,000, saving the company nearly a quarter of its total tax bill. "The credit has definitely influenced our decisions on investing new money in product development," Wood says.

The credit has worked in two ways: Companies averaged their R&D spending from 1984 to 1988, then took a tax break on 20 percent of any research spending over that figure; or they used more recent years as a basis, but the credit was smaller, so few companies used this method, says Marty Karamon, senior tax manager at Deloitte Tax LLP.

The credit was simplified in December, allowing companies to add up the past three years' qualified research expenditures, then divide by two to get their base line figure. The business can take a credit for 12 percent of any spending above that base line.

Next up, says Karamon, is the battle to get the credit extended to cover additional years.