Some biomedical device development companies may be trying to wring every last dollar out of operations during these trying economic times. These same companies may be overlooking a significant source of revenue that can help hire additional workers and expand operations: the research and development tax credit.

Large corporations have banked on these credits for years; feeding a misconception that they are limited to hi-tech, cutting-edge research companies, multinationals, and Fortune 1,000 firms. This was certainly one of the goals when Congress enacted the R&D tax credit. However, an equally important goal was to fuel innovation and hiring at small and mid-sized companies. Some of the most recent changes to the credit have helped further this goal dramatically.

For example, in the last few years, Congress made modifications to the documentation and qualification requirements, which have greatly expanded the utilization by companies outside of the Fortune 1,000.

Recent court rulings have also boosted eligibility and provided much-needed clarification. Just last year, five major R&D tax credit court cases added additional guidance in this area. One case involving TG Missouri Corp, a Perryville, MO, automotive supplier, had broad implications for companies in the plastics industry. Specifically, the court ruled that a company could capture supply expenses incurred for the development of tooling and dyes that were sold to the client. This case is particularly relevant for biomedical device companies that utilize molds and dies for the development of components associated with their end devices.

With that in mind, and if you’ve ruled out the R&D credit in the past or never thought it might work for your business, it pays to look again, especially with professional assistance.

A company that has invested time, money, and resources toward the advancement and improvement of designs and processes may qualify for the R&D tax credit. Specific research activities such as improving a biomedical device’s functionality, researching the possibility of utilizing a device for an alternative indication, conducting tests to satisfy foreign regulatory requirements, or generating prototypes and first articles of new products for testing and validation can be eligible for R&D tax incentives.

Potentially hundreds of thousands of dollars may be at stake, as companies with qualifying R&D activities are entitled to a 20% research tax credit, subject to certain limitations for previous years. The credit is much more powerful than a standard deduction because it offsets taxes owed or paid, dollar for dollar, as opposed to just reducing a company’s taxable income. Further, a business can obtain the credit for all open tax years — generally the last three or four years plus the current year. It can also carry them forward 20 years.

The key is to throw out the old definition of R&D, which many believe is limited to developing products that are new to the company and the industry. While that may be true, for purposes of the R&D credit, the definition is much broader. Today’s R&D is defined as developing new or improved business components, including products, processes, formulas, techniques, inventions, and software. Companies can realize significant tax savings by capturing expenses incurred during these qualified projects and activities. These expenses can include wages, supplies, and even contractor costs.

So a whole new host of activities that many businesses might view as operating expenses are potentially eligible under the R&D credit.

One example was a fracture fixation device development company with approximately $10 million in annual sales that qualified for both federal and state credits. This resulted in $260,000 in federal credits and $250,000 in state credits for the company, who had previously not realized they qualified for both credits.

Another biomedical device development company was able to take advantage of federal and state R&D credits to realize $470,000 in tax credits. For a company with merely $4 million in annual sales, this savings represented a significant source of revenue for the company. As is far too often the case, this company was unaware that it was an excellent candidate for these credits.

These examples illustrate how more businesses are beginning to take full advantage of this important tax incentive program. While the process at times can be somewhat complex, it essentially begins with a careful tax analysis and concludes with documentation and filing amended returns. It can also result in a brand new source of valuable funds in these trying economic times.

Congress and many state governments are increasingly realizing how critical innovation is to the future of America’s competitiveness in the world, and the R&D credit is an important incentive to nurture that innovation. They also understand the companies engaging in these activities are supporting millions of skilled jobs.

We expect the R&D credit will be around for a long time. Companies with relevant products or services would be smart to realize its benefits by taking a strategic approach to R&D tax credits. Through R&D tax credits businesses can realize significant cost savings benefiting the company, its employees and the economy as a whole.