Tax Incentives Blog

Are Manufacturing Activities Qualified for the R&D Tax Credit?

Written by Mark Echols. Updated Sep 5, 2018.

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Manufacturing companies are a perfect fit for federal and state R&D tax credit.  While over 60% of the companies claiming federal R&D tax credits are in the manufacturing industry, many manufacturers are still unaware that their company’s manufacturing activities are eligible for the credit.  You do not have to be a high-technology or medical research-intensive company to enjoy the financial benefits of these valuable R&D tax credits.  For many U.S. manufacturing companies, the R&D tax credit remains one of the quickest ways to accelerate their growth and bottom line profitability.

For manufacturers, all of the key R&D expense types are applicable: wages, supplies, and contract research expenses.  One of the key eligible research expenses is employees’ wages for personnel performing research and experimentation activities such as developing and manufacturing a new or improved product.  Many manufacturers hire engineers, production managers, test technicians, continuous improvement personnel, and quality analysts to help research, design and develop new or improved production processes.  For example, we recently worked with a large automobile parts manufacturer who created several new auto parts and production processes to more efficiently manufacture their products.  This particular company hired many employees who touched some part of the manufacturer’s product development lifecycle.  In the end, this manufacturer had over $1 million in qualified wages and over $100,000 in combined state and federal R&D tax credits.

Within the manufacturing industry, supply expenses can be a significant amount of the eligible research expenses as companies frequently use or consume material supplies in the conduct of their research.  For instance, if a manufacturer is building a physical prototype, they will frequently spend a significant amount of their budget on supplies such as expensive metals and plastics when building and testing their new products and/or processes.  It’s not unusual for manufacturers to spend hundreds of thousands of dollars on research supplies as these companies are doing much design and testing activities.

The other important research cost is contract research expenses.  Frequently, manufacturers will hire outside experts and consultants to perform research and testing activities for the company especially when they do not have that specific expertise in-house.  Companies can claim 65% of any eligible contract research expenses as long as the company has substantial right to the research done on their behalf and they also bear the expense of the research.  It’s important to review every contract for these “rights and risks” tests before claiming any contract research expenditures.

The key takeaway here is that manufacturers can have significant tax savings for their research and development activities and should take into account all of the activities and related expenditures when claiming R&D tax credit benefits for their company.

For more information on tax incentive programs available in your area, find your state below. 

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Topics: R&D Tax Credit

Mark Echols

Written by Mark Echols

Mark leads CTI’s national research and development (R&D) tax credits practice and is involved in all aspects of providing R&D tax credit services to his clients, including: conducting high-level R&D tax credit feasibility analyses, managing complex and comprehensive R&D tax credit studies and defending R&D tax credit claims under IRS and state taxing authority examinations.

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