Popularly known as the R&D credit, the federal tax credit for increasing research and development activities can be a valuable break for manufacturers. An eligible company’s tax liability can be reduced as much as 7.9 cents (or more if state research credits are available) for each dollar of qualified research expenditures on wages, supplies, consulting fees and contract research for eligible companies. But many manufacturers lose out because they underestimate their R&D expenditures or believe their taxable income is too low to make it worthwhile.
More Than Just Scientific Research
When people think about R&D, they often think of biotech and pharmaceutical companies, but the R&D credit is available to many types of businesses. Qualifying research must generally:
- Be related to development or improvement of a product, process, software program or other “business component”
- Attempt to eliminate uncertainty over whether, and how, the business component can be developed or improved
- Involve a “process of experimentation,” using techniques such as modeling, simulation or trial and error
- Be technological in nature, meaning it relies on engineering, computer science or “hard sciences,” such as biology or chemistry
Although qualified research expenditures don't need to lead to innovations that are new to your industry, the changes must be new to your company. For manufacturers, this may include:
- Developing new products
- Redesigning products to make them cheaper, cleaner or more durable
- Redesigning processes to make them more efficient, safer or less wasteful
- Experimenting with new packaging materials or techniques that reduce costs, avoid waste or minimize environmental impact
- Developing or improving robotics or other automated technology
- Optimizing tooling or equipment placement
- Developing software or other methods for improving quality control
These are just a few examples, but they give you an idea of the broad range of eligible activities.
Start-ups and Small Businesses: Expand your Benefits
Legislation enacted in 2015 expanded the credit's availability by allowing start-ups to offset R&D credit against up to $250,000 in payroll taxes, another reason to revisit the R&D credit. Generally, start-ups are businesses in operation for less than five years with less than $5 million in gross receipts.
Also, small businesses (those with average gross receipts of no more than $50 million) are allowed under the legislation to use the credit to reduce their alternative minimum tax (AMT) liability. Note that 2017’s Tax Cuts and Jobs Act eliminated corporate AMT, but owners of pass-through entities may still benefit from the change.
Worth Another Chance
It is time to revisit the potential benefits of claiming R&D credits, if your company hasn't been already. The credit, if available, can boost your cash flow by reducing your tax liability. In addition, you may be able to claim credits you missed over the last few years by filing amended returns, to find out how, contact us today.