Why are manufacturers still not taking the R&D Tax Credit?
May 11, 2017
In the state of Georgia alone, nearly 85 percent of manufacturers surveyed in 2016 are missing out on valuable R&D Tax Credits at both the state and federal level. Some companies don’t think the credit applies to them, but there are many qualifications businesses may not be aware of — and eligibility isn’t limited to manufacturing, either. If you implement a new system, build a new product line or develop a new formula, your company can take advantage of the credit too.
This type of valuable insight comes from working with a business advisory or accounting firm that specializes in the R&D Tax Credit to identify qualifying expenses. Doing so ensures that manufacturers, in particular, are maximizing their use of the credits.
Reap the Rewards of Innovation
The groundwork for the Credit for Increasing Research Activities (or, R&D Tax Credit) was enacted as part of the Economic Recovery Tax Act in 1981 as an incentive for American innovation. Any company in any sector that designs, develops or improves products or processes may be eligible, and can realize an immediate benefit with a dollar-for-dollar offset against tax liability. Manufacturers can claim the credit for labor, supplies and other expenses related to designing or improving a product or process.
The Protecting Americans from Tax Hikes Act (PATH) of 2015 not only made the R&D Tax Credit permanent, but added enhancements to provide for additional savings. In the past, some small and medium-sized manufacturers couldn’t claim the R&D Tax Credit because the owners would be subject to the Alternative Minimum Tax (AMT) which made the credit useless. The PATH Act has eliminated the AMT for small businesses that have had less than $50 million in average gross receipts for the past three years.
According to the IRS, it is the business tax credit available in the United States and provides an estimated $10 billion in annual tax savings for U.S. companies, with manufacturers comprising nearly 40 percent of that amount. Yet some companies remain unaware of or neglect to take full advantage of it due to misconception, confusion and myth. While innovation can be its own incentive, taking advantage of the tax savings available saves you cash you can use to keep innovating.
A New and Improved R&D Tax Credit
Once you’ve determined your business’ eligibility for R&D, think ahead: With the annual uncertainty of the temporary credit gone, you can implement a more long-term strategy for offsetting your R&D costs. Taking full advantage of the R&D Tax Credit is especially important at a time when your company is investing in new software solutions and technologies, such as IoT and automation.
Qualifying expenses can include anything a company does to make its products better, faster or cheaper. For manufacturers, this could be everything from labor and travel to capital investments, supplies and materials that go into trial-and-error processes, new solutions, parts or products. Employees that use an iterative process based on hard sciences, such as engineering or computer sciences, may have time that qualifies. Consumable materials used in the process may also be applied to the credit. The federal R&D Tax Credit averages roughly 6.5 percent of combined qualified R&D labor and supplies.
Maximize Your Tax Savings
The bottom line? Manufacturers can (and should) maximize R&D Tax Credits. Look into educating personnel on activity qualification criteria, investigating qualified activities and costs, and interviewing company technical personnel to discover where additional R&D expenditures may be found. A business advisory firm can help calculate the credit to maximize the manufacturer’s benefit and substantiate the claim with source documentation. The findings are aggregated in an executive report which can also serve as audit support in the event the credit is audited by taxing authorities.
By better understanding your company’s eligibility, the advantages of R&D and a long-term strategy to maximize the credits, you will maximize your potential in terms of innovation and cutting-edge technology, with the savings to get you there.
About the Author
Carli is the partner-in-charge of R&D Tax Credit Services at Aprio. Carli has dedicated the last five years to performing R&D Tax Credit studies for clients in a variety of industries, with a specialty in the manufacturing and technology industries. She has worked to prepare R&D Tax Credits for companies ranging from startups to Fortune 500 businesses, performing technical interviews with subject matter experts, calculating complex credits and preparing technical reports.