Posted by ND Business Watch on September 1st, 2010
Businesses that enjoy long-term success invest in innovation.
They’re in a constant state of reinvention, searching for new ways to improve their products and services and improve operational efficiencies.
What many successful business leaders don’t realize is that their investments in research and development can often yield significant federal and state tax reductions.
The federal government and North Dakota provide dollar-for-dollar tax reductions for qualified research and development activities as an incentive for businesses to incorporate process improvements, develop better products and to remain competitive in the global marketplace.
Federal R&D tax credits have been available for nearly 30 years, but are not part of the permanent tax code. The federal tax credits expired in 2009, but are expected to be renewed for 2010, said Scott Schmidt, principal of Black Line Group. The Minneapolis-based firm focuses exclusively on providing R&D tax credit expertise to small- and medium-size businesses. Black Line Group is a member of the North Dakota Trade Office and regularly meets with leaders of North Dakota manufacturers and technology companies to determine if their work activities merit filing for R&D tax credits.
The definition of “research and development” for North Dakota’s research expense credits mirror the federal tax code. Businesses that qualify for a federal R&D tax credit will qualify for North Dakota tax reductions as long as the qualified research activities take place in North Dakota, Deputy Tax Commissioner Ryan Rauschenberger said.
North Dakota allows a tax reduction of 25 percent on the first $100,000 of R&D expenses. North Dakota is one of only a few states that also allow companies to transfer, or sell, as much as $100,000 in unused R&D tax credits, he said.
Most Fortune 1,000 companies take advantage of R&D tax credits, claiming $5 to $7 billion in reductions every year. But many small- and medium-sized businesses fail to capitalize on the tax breaks, largely because they don’t realize their work activities qualify, Schmidt said.
During a recent meeting at the University of North Dakota’s Center for Innovation, Schmidt told a group of business leaders and accountants that the definition of research and development is much broader than most business operators realize.
“Work involved in developing or improving a product or process – that generally will merit R&D tax credits,” Schmidt said. “You don’t have to have a research department or an R&D line item in your books to qualify.
“For tax purposes, it involves much more than what occurs in a laboratory,” he said. “Manufacturers of all kinds, including those involved in metal stamping, metal fabrication, precision machinists and plastic injection molding can have research and development taking place.”
R&D spending includes salaries and wages paid to conduct research and to supervise or support research. It can include supply costs and some payments for contract labor. Qualified activities include:

• Developing new, improved or more reliable products, processes or formulas
• Customizing products to meet customers’ needs
• Developing prototypes including computer-generated models
• Experimenting and testing of new materials
• Developing software or hardware
• Testing of new concepts and technology
• Adding equipment to improve processes

Setting up a reporting process can be demanding, but well worth the tax savings, said Brian Dahl, vice president of operations at Fargo-based Amity Technology.
A leading international supplier of sugar beet harvesters, Amity Technology has generated significant savings through R&D tax credits, Dahl said.
About 70 percent of Amity Technology’s business is outside the United States. The manufacturing company employs about 110 workers, including 12 full-time engineers who are charged with meeting the equipment needs of a changing, global industry, Dahl said.