Who wouldn’t be exultant to recover money they thought was gone? Consider the case of one mid-size packaging company in Colorado. According to tax consultant Lawrence Knutson of Denver’s Keefe Steiner & Hoffman PC, this packager was approached by a fishing equipment manufacturer that had been asked by Walmart to develop biodegradable packaging because fishermen were discarding the old, non-biodegradable packages in the wilderness.

This company worked with the manufacturer to research biodegradable materials, design the package and label, then test market and produce the final product. Both the manaufacturer and Walmart bought into the results, but by then the packager had invested $850,000 worth of research and development into the new package.

By applying the seldom-used federal research tax credit, that Colorado packaging company earned a healthy credit – not a deduction – that reduced their tax bill by $50,000.

Many business owners believe this credit is only available to giant corporations that pour millions into R&D. Not true.

Small- and medium-size companies also may be able to grab back some of those dollars thanks to a nearly $6 billion annual federal subsidy designed to stimulate innovation and reward continually increasing investment in research The temporary research tax credit must be renewed annually by Congress, as it has been almost continuously since it was launched in 1981. As of presstime, the credit hasn’t been renewed for 2010. However, Congress now talks of making the measure permanent.

The IRS code governing the credit is complicated. It requires thorough documentation, and record-keeping costs can make it prohibitive for small R&D budgets (especially the first time). Nonetheless, packagers, material suppliers and equipment companies all pursue activities that could make them eligible for the credit. To qualify, a company must meet four requirements:

• Create a new or improved product or process.

• Use principles of science in the research.

• There must be some level of uncertainty as to the capability, method or design of the final product or process.

• Research must involve a process of experimentation.

In 2010, give yourself credit if you start developing packaging with extended shelf life, automating your packaging line or redesigning your process to cut waste. But don’t take my word on it. Consult a knowledgeable tax professional to get full credit.

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