Tax credits and incentives: How to increase jobs, spur innovation, and grow the bottom line

Due to exponentially increasing energy demands and ever-changing regulations, the oil and gas industry is currently scrambling to develop the most efficient possible solutions to many complex issues.

Oct. 1, 2011

4 min read

Dean Zerbe, alliantgroup, Washington, DC
Rizwan Virani, alliantgroup, Houston

Due to exponentially increasing energy demands and ever-changing regulations, the oil and gas industry is currently scrambling to develop the most efficient possible solutions to many complex issues. Companies around the United States are undertaking high-cost projects to improve upstream production technologies, optimize process systems, and develop customized engineering design solutions and construction techniques. Many companies are unaware that the costs incurred during their day-to-day projects are eligible for research and development tax incentives.

The R&D tax credit is a business tax incentive for companies that provide unique solutions to present-day market needs. The traditional notion of research and development brings patents and lab coats to mind, but R&D is actually defined much more expansively.

The R&D credit provides a direct reduction of tax liability for labor, supply, and contractor costs that are incurred on projects that are technological in nature, and is in place to incentivize the development of specialized solutions to engineering and construction projects. The credit is intended to reward the expansion of domestic development activities.

To qualify for the R&D credit, projects must meet a few generally defined criteria. For example, projects must be undertaken to develop a new or improved design solution, such as a custom product, engineering design, or construction technique. In addition to qualified research, qualified activities include direct supervision and support as well.

The projects undertaken by the oil and gas production industry are typically quite challenging and unique, thus increasing the likelihood that the activities conducted will qualify for the credit. Companies all over the nation are constantly expanding their capabilities by taking on projects to improve efficiency while complying with ever changing regulations and site specific constraints. It should be noted, however, that expenses for prospecting or determining the location of oil and gas deposits does not qualify.

Let's consider an example of a company applying for an R&D credit for tax year 2010: A multi-discipline engineering EPC firm with $35 million of yearly gross revenue and $23 million in W-2 wages. The company designs process piping and structural systems for upstream and downstream facilities; employing a team of project managers, project engineers, design engineers, and CAD drafters that participate in design and development processes. An in-depth study found that the company spent about 20% of its labor costs on qualified research activities. The nearly $5 million in qualifying labor cost resulted in a net tax benefit of $280,000.

Another company in the same industry, with annual revenue of $25 million, designs and manufactures customized control units for blow out preventers which are utilized to control pressure within deep sea oil drilling systems. The company develops each blowout preventer (BOP) control unit for customer-specific applications, to fit within unique site constraints, and to interface with existing systems throughout drilling platforms.

The company employs mechanical and electrical engineers, programming logic control (PLC) programmers, and a team of specialty assemblers and welders. Each system design is unique and designed for the company's clients' applications. In this example, approximately 35% of the company's annual $3.5 million in wages from 2007 to 2010, as well as all supply costs associated with each unique unit qualified for the R&D credit, resulting in tax credits totaling $500,000 over the four-year period.

As oil and gas consumption and corresponding production continues to increase, more and more companies will seek to develop new technologies, engineering designs, and unique construction means and methods. The efforts put forth into this research are crucial to ensure the continued growth and superiority of the American oil and gas production industry.

Companies small and large have engaged in development activities that provide unique solutions to complex issues and result in new domestic jobs. The R&D tax credit exists to ensure that this growth continues and that these activities occur in the United States rather than abroad. The federal government and many states offer significant tax incentives, and many companies are not taking advantage of these benefits. Companies that believe that their activities qualify should speak with their financial advisors. OGFJ

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