So your organization is going green! Greening up an organization requires a number of energy efficiency and environmental sustainability initiatives. Projects usually include things like purchasing and developing product materials, updating manufacturing processes, or even investing in new or substantially upgraded facilities. In this regard, you are already running cost-benefit models and engaged in an all out hunt for cost reductions or expenditure offsets.

Many organizations in Canada and the US, currently working on lessening their environmental footprint and cutting down energy bills, have looked at taking advantage of the government tax incentives for investing in certain renewable energy assets or the commercial building tax deduction in the US, please refer to our previous article on this topic: Using Tax Incentives to Pay for Energy Projects. However, based on an investigation into the latest filing statistics from the US and Canadian federal governments, it would appear that few businesses have extended their search and explored cash recoveries in the form of research and development (R&D) tax credits. The statistics on companies making claims for these credits show that there were only 18,000 claims in the US and 19,000 claims in Canada – and that says a lot! The US pays out over $6 billion, Canada some $3 billion annually in federal R&D tax credits, leaving just a few businesses to reap fantastic rewards. These incentives have been available for over 20 years and are premised, in part, on belief that governments have an obligation to share in the R&D risks undertaken in the private sector.

Beyond the funds available and the number of recipients, there are also points of technical differentiation between the two federal R&D tax credit regimes. First, in Canada, the rules are permanent, while in the US, they tend to only apply for one year. However, since the US R&D tax credit has been extended some 13 times since its inception, there is a working assumption that the credit will always be available. In fact, as we go to press with this article, the US R&D tax credit, which expired at the end of last year, is tied up in the same political Senate wrangling as the energy tax incentive extenders, please refer to our previous article on this topic: US Political Wrangling Stalls Renewable Energy Tax Extenders. Luckily, expectations are high for the continued extension of all these tax incentives since both parties tend to support the underlying policies, just have differing opinions on where the sources of funding should come from (note the extender legislation may not be finalized until after the November elections). The second technical difference occurs in the formula used to calculate tax credits. In the US, incremental spending is the main driver of tax credits, which means you have to increase your spending from past years to maximize your tax credits.

Now, how do you get cash for doing R&D? Let's pare down these incentives to their more significant underpinnings. Activities that qualify as R&D include those related to new or improved products or processes, that are technical in nature, are carried out in a systematic process of experimentation and are intended to eliminate uncertainties. The value of the credit depends on a number of expenditures, including wages, materials consumed, certain third party contract payments, and in some cases assets used. Interestingly, both countries have recently taken steps to make their R&D tax credits more user-friendly in terms of qualifying activities and assessing protocols, making it easier to recover a portion of the costs of going green through R&D tax credits.

Are you beginning to see the congruence between what you are doing to go green and your entitlement to R&D tax credit cash? The key to accessing this money is to first be aware of the incentive programs and, secondly, here comes the hard part, committing resources to a contemporaneous documentation of your qualifying R&D activities as prescribed by the tax rules. This documentation requirement is typically the reason businesses do not claim R&D tax credits for what they are already doing. The trick for making an application for R&D incentives cost-effective is to build it right into your green strategic and tactical planning process.

Now for the interesting part: how much cash can you get out of this nominal extra effort? That really depends on where you are carrying out your R&D activities, with Canada beating out the US. In Canada, the federal rates run from 20 per cent for most companies, getting up to 35 per cent for small companies owned by Canadians, while the provincial rates can exceed 35 per cent. In the US there are three different choices in federal credit methodology, no differentiation based on share ownership, and now over 30 states with their own R&D tax credits. Due to the complexity of the US rules, it is really only possible to suggest that the maximum rate for both individual states and federally runs around 20 per cent and that the combined effective rates will never reach these levels. Interestingly, the US tax system inadvertently makes up for these lower credit rates by allowing for retroactive claims, up to four years old; Canada is not so generous. And, while we refer to these credits as a source of cash, in many cases the credits will actually serve you not with a wad of green, but instead by knocking off a portion of your tax bill.

Don’t take our word for the increasing convergence of energy efficiency and environmental sustainability initiatives and the R&D tax credit as a source of funding. Starting back in 2005 in the US, the Energy Tax Incentives Act of 2005 brought in special new R&D qualifying expenditure rules for contract payments made to entities such as research consortia, universities and federal government labs for work specifically on energy research. Looking forward, it would appear that even the presidential hopefuls are getting with the program. In Senator McCain’s energy plan, the Lexington Project, there is a specific recommendation for a permanent tax credit for clean energy R&D.

To the extent this resonates with you, empower your internal engineers and accountants or meet with one of the many consultants that have R&D tax credit expertise, and embed this process into your going green platform now. Start claiming the R&D tax credit cash you are entitled to – this could well be the largest source of expenditure offsets you are going to find as you go green.