Does your manufacturing company develop a new or improved product or process? If so, you are likely eligible for a valuable corporate tax credit!
Since 1981, companies of all sizes have been able to enjoy the benefits of the R&D credit, with companies in the manufacturing industry accounting for over 60% of the annual credits claimed by taxpayers. Sounds like great news, but the fact is only 1 in 20 manufacturers claim the R&D credit. Many small and medium-sized manufacturing companies are eligible for the R&D credit, but they frequently and erroneously believe that only companies developing or manufacturing products new to the world are eligible for the credit and therefore miss out an opportunity to substantially save their company money each year.Many manufacturers have Incremental improvements and modifications to existing products or manufacturing processes that can be an eligible activity such as:
- Developing new or improved parts.
- Creating prototypes for experimental testing of new or improved products.
- Designing and implementing automated processes
- Testing of new or improved computer systems and controls.
- Designing new robotics automation for manufacturing.
- Development and modification of manufacturing processes to eliminate manual steps.
- Development of new or improved fabrication of manufactured components.
- Improvements in methods to identify material defects and limit performance and durability issues.
- Design and development of new tooling and dies used in production process.
- Even original equipment manufacturers (OEMs) can claim the R&D credit.
The largest qualified expenditure for most manufacturing companies is wages paid to in-house engineers, scientists, technicians, production employees and other technical personnel who perform research activities for their company. We can help companies review, identify, and categorize these employees into qualified and non-qualified activity buckets.
In addition to employee activities as eligible research expenditure, another manufacturing expenditure is contract research expenses, which is 65% of “any amount paid or incurred by the taxpayer to any person (other than an employee of the taxpayer) for qualified research” is eligible for the R&D credit. For example, if your company hires a third-party developer to build and test a prototype for your manufacturing company; you can claim these costs as eligible contract research expenditures. We can review the contract or agreement to make sure you as the taxpayer have to have substantial rights to the research and take on the economic risk of the research.
The last overlooked expense are supplies. For R&D credit purposes, R&D supplies are any tangible property other than land, land improvements or other property subject to depreciation that is used or consumed during research. Supply expenses must be directly linked to qualified research activities, including prototypes and testing materials. Taxpayers routinely fail to properly claim their supply expenses because they have not shown how these expenses were used during research or conversely, they failed to recognize them as an eligible expense in the first place.
To illustrate the last point, a recent court case expanded the application of supplies eligible for the R&D credit for many companies including manufacturers. The court ruling in TG Missouri Corp. v. Commissioner provided that molds and prototypes used for production, if not depreciable property, are eligible for the R&D credit, making it easier for manufacturers to include certain supply costs as qualifying for the R&D credit. It doesn’t matter whether the supply (prototype) is ultimately used as a model or ultimately sold to customers.
The R&D credit is one of the largest incentives available to manufacturers and can possibly save your company hundreds of thousands of dollars each year as long as you know what activities are eligible for the credit and what expenses can be utilized to optimize the tax savings.
For more information on tax incentive programs available in your area, find your state below.