The R&D Tax Credit: Benefits to Manufacturers
By Joe Stoddard, CPA, Partner
Many of us picture a scientist in a white lab coat when we hear the term “R&D.” But, that term also applies to innovation in other industries, including manufacturing. Fortunately, there’s a tax credit available to those outside the medical industry that take the risk to innovate.
What is the R&D Tax Credit?
The research and development tax credit was enacted in 1981 to promote innovation and keep jobs in the U.S. A major regulation change in 2003 opened the door for small to medium size businesses to take this credit.
The R&D credit is a permanent credit and computed annually, providing a nice annuity. R&D tax credits can be determined for the current year as well as other open tax years. A 2016 law change now allows the credit to offset Alternative Minimum Tax for companies with less than $50M in revenue—making the credit more beneficial than ever.
What is the size of a typical credit?
The financial benefits vary based on a company’s activities, but as a rule of thumb, a company with $500,000 of qualified R&D costs can see a credit benefit of $25,000 to $35,000. Many states also offer an R&D credit which can double the benefit and can be refundable in certain states. Thus, the total credits may exceed $70,000.
How do I know if my company qualifies for the R&D tax credit?
Qualification for the R&D credit revolves around activities (e.g. design, materials used, or applying technology in a new way) where the design is uncertain and there is an assessment of alternatives. Activities that could potentially qualify for the credit include:
- Development of new, improved, or more reliable products, processes, and techniques
- Development or improvement of production / manufacturing processes
- Development of prototypes or models (including computer-generated models)
- Design of tools, jigs, molds, and dies
- Development or testing of new concepts and technologies
- Development or customization of software
- Automation and/or streamlining of internal processes
To start, talk to your tax advisor about feasibility. An R&D tax expert will know the right questions to help you understand whether a more in-depth study makes sense for your business.
What information is needed to claim the credit?
In general, you’ll need to provide two types of documentation to get started:
- Wages and a time estimate of those individuals involved in the R&D
- Total supply costs and third party contractor costs related to the R&D
The information will be gathered for the current year as well as prior years to compute the credit.
As the R&D Study progresses, additional contemporaneous documentation that supports the qualified activities will also be collected. This could include: project charters, power point presentations, design documents, emails discussing technical challenges, drawing iterations, or test reports to support R&D activities.
What are some examples of manufacturers that have taken advantage of the credit?
- An agriculture equipment manufacturer with $24M in annual revenue was developing new and improved equipment to enhance its effectiveness and improve a farmer’s productivity. The manufacturer was also focused on improving their manufacturing processes. These activities resulted in federal and state credits totaling $112,000.
- A label manufacturer with $40M in annual revenue was working with new materials and printing methods to develop customer packaging labels and converting solutions in the medical, industrial food and beverage, and household products industries. These activities resulted in federal and state credits totaling $75,000.
- A manufacturer with $49M in annual revenue focused on the design and engineering of new precision cutting products through the use of new raw materials and the development of new manufacturing processes. The qualified activities resulted in federal and state credits totaling $122,000.
To learn more about R&D Tax Incentives, watch our recent video.
Please reach out to Joe Stoddard (firstname.lastname@example.org) with any questions.