How Will the Senate’s New Manufacturing Bill Impact the R&D Credit?
August 3, 2017
In 1981, the Research and Development (R&D) Tax Credit was created with the intention of incentivizing the expansion of American research spending and growing the country’s competitiveness within the global marketplace. Over the years, the R&D Credit has been expanded and renewed multiple times, becoming permanent and improved in 2015. Yet there continues to be an increasing trend of outsourcing R&D activities, particularly manufacturing operations, to foreign counties with lower labor costs. In the last 17 years, more than five million manufacturing jobs in the U.S. have been lost, and over 70,000 manufacturing plants have closed or relocated offshore.
To combat this trend and reduce the threat to innovation and production, Senators Chris Coons and Pat Roberts introduced the Invent and Manufacture in America Bill on June 6, 2017. This bill is intended to enhance and expand the existing tax credit by up to 25 percent for companies that both participate in R&D and choose to manufacture any products resulting from R&D within American borders. The credit expansion is designed to operate through graduated increases, allowing the credit rate to grow as the percentage of domestic manufacturing rises.
The senators introducing the bill agreed that the measure is intended to bolster American invention and production. According to Senator Roberts, the “legislation would increase cash flow for small businesses and start-ups involved in R&D intensive activities by reducing past, current, and future tax liabilities to permanent tax savings.” Industry experts have also noted that the amount of R&D activities a company engages in can increase up to 50 percent when located near a manufacturing facility; therefore, by incentivizing the retention of manufacturing facilities in the United States, the credit will also result in increased research and innovation as well.
The legislation also serves as recognition of the substantial amount of qualified research activities involved in manufacturing processes. Invention cannot lead directly into full-scale production. Developers must design and assemble prototypes, extensively test and redesign the prototypes and perform numerous trial runs all prior to beginning production. Additionally, changes must be iteratively made to the manufacturing line, including process improvements to increase safety, efficiency, speed and accuracy. Many manufacturers also experiment with process improvements to reduce energy consumption. Each of these activities individually incur costs which, under the new legislation, can be more substantially captured through the R&D Credit.
R&D activities in the U.S. are a critical factor to successful economic growth. Senator Roberts believes that “new technologies, products, and lower prices generated by investments in R&D create new jobs, raise wages, and create new demand for goods and services.” The Invent and Manufacture in America Bill will be good for all Americans, including those who do and those who do not participate in research, development and manufacturing. Even though manufacturing already constitutes the largest industry participating in the existing R&D Tax Credit by claiming more than half of the $12 billion claimed annually, supporting domestic invention and production will further strengthen American innovation and encourage American competitiveness in the global market. Additionally, the new expanded credit will provide much needed relief to the companies that are already participating in the design, development and manufacture of products in America.
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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.