Research activities such as developing new applications for an existing technology, 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
During these trying economic times, some manufacturing companies are looking to wring every last dollar out of operations, however, they may be overlooking a significant source of revenue for hiring additional workers and expanding operations: the research and development tax credit.
Big companies have banked on the credits for years; feeding a misperception that the credit is limited to hi-tech, cutting-edge research companies, multinationals or Fortune 1000 firms. While certainly one of the goals when Congress enacted this credit, an equally important goal was to fuel innovation and hiring in the area which produces the most jobs in America: small and mid-sized companies. Recent changes to the credit have helped further this goal dramatically.
Over the last few years, Congress reduced the documentation and qualification requirements to make this credit accessible to companies outside of the Fortune 1000. Court rulings have also boosted eligibility and provided much-needed clarification. In the last two years, five major R&D tax credit court cases added additional guidance in this area. Further, all of these cases resulted in taxpayer-friendly outcomes providing a clear, consistent, affirmative message toward estimation and costs that can be claimed.
One case involving TG Missouri Corp., a Perryville, Missouri automotive supplier, had broad implications for companies in the plastics and manufacturing industry as a whole. Specifically, the court ruled that a company could capture supply expenses incurred for the development of tooling and dies sold to the client. Another case involving Trinity Industries reaffirmed this decision and expanded its applicability toward manufacturers developing products sold to clients. The court ruled that Trinity could capture all of the expenses related to some of the unique boats the company developed. When viewed through the prism of the manufacturing industry this applies to the tooling and prototypes sold to clients such as the explosive bolt housing on a rocket or the plastic injection mold developed to make a plastic car part.
Last year, more than $16 billion in federal tax credit funds were made available for R&D activities, including R&D activities for within the manufacturing industry.
Consider, for example, if a company has invested time, money, and resources towards the advancement and improvement of designs and processes. If so, it may qualify for the R&D tax credit. Research activities such as developing new applications for an existing technology, 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.
Hundreds of thousands of dollars could 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.
Not Limited to Products
As with any tax incentive program, the angel (as opposed to the devil) is in the details.
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 industry as a whole. For tax purposes R&D is defined as developing new or improved business components which are new to the company or application, 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 outside contractor costs.
So a whole new host of activities that many businesses might view as operating expenses are today potentially eligible qualification under the R&D credit. Significantly important to manufacturers, the manufacturing processes developed for making parts can meet these requirements. This includes the unique travelers and routers developed for manufacturing hundreds of parts through first article testing of processes designed to fabricate components out of exotic metals such as inconel or titanium with irregular angles and shapes for welding.
An automotive manufacturer and assembler with $500 million in revenues realized a credit for a couple of years in excess of $1.5 million due to changes in law that enable the costs related to plastic injection molds and tools sold to customers to be claimed.
Similarly, a tire mold manufacturer realized about $60,000 in credits from the design of tire molds and the related costs of tire mold prototypes.
These examples illustrate how more businesses are taking full advantage of this important tax incentive program, resulting in a new stream of income in these trying economic times and saving jobs. How many millions of dollars in new business do you have to generate to add that kind of a punch to the bottom line?
The U.S. Congress and many state governments realize 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 know that the companies engaging in these activities are supporting millions of high-skilled, well-paying jobs.
For these and other reasons, the R&D credit will be around for a long time and any company with relevant products or services would be smart to realize its benefits. By taking a strategic approach to R&D tax credits, businesses can realize significant cost savings benefiting the company, its employees, and the economy as a whole.
Walter Marvin is an Associate Director for alliantgroup and a member of its Manufacturing Industry Specialization Program. Jeremy Troutman is an Associate Director for alliantgroup and a member of its Manufacturing Industry Specialization Program.