R & D Tax Credit for Manufacturers
From Engineered Tax Services
The Research and Development (R&D) Tax Credit is a permanent federal tax incentive meant to stimulate innovation, technical design and manufacturing within the U.S. Most states have a similar tax incentive as well. While the R&D Tax Credit was available since 1981, tax regulations that were finalized in December 2003 significantly increased the types of activities that qualify for the credit.
Manufacturers often do not realize that they are eligible for the Research and Development tax credit. The R&D tax credit allows companies to realize tax savings, increase cash flow and stay competitive in the marketplace. Many of the qualifying activities are considered day-to-day operations for these companies. Manufacturers who develop new or improved products or processes qualify for this incentive. Less than one-third of eligible companies realize they qualify for the R&D tax credit. Also, many of the companies that are taking the credit are not claiming all of the credits to which they are entitled.
The Research Tax Credit can provide a hidden but immediate source of cash for manufacturers from prior years, plus a significant reduction to current and future years’ federal and state tax liabilities.
Typical Qualifying Research and Development Tax Credit Activities:
- Product development using computer aided designing
- Prototyping and 3D modeling
- Designing manufacturing equipment
- Alternative material testing
- Improve manufacturing and production
- Developing new or improved products or processes
- Developing tooling and assembly design solutions
- Designing and developing cost-effective business activities or tasks
- Value engineering
- Improve product performance and manufacturing practices
- Evaluate material or substance flows
- Designing and evaluating process alternatives
- Product design processes – prototype design, development, and testing
Two Significant Enhancements to the R&D Tax Credit Began in 2016
- Companies with less than $50 million in gross receipts (prior 3-year average) can use R&D credits to reduce Alternative Minimum Tax (AMT). This is very significant, especially for flow-thru entities, whose owners are in or close to AMT every year.
- “Start-up companies” (companies with less than $5 million of gross receipts for the year and no gross receipts more than five years ago) can use R&D credits to reduce a portion of their federal payroll taxes going forward – specifically the employer’s Social Security portion of FICA taxes (6.2% of wages up to $127,200 per employee in 2017).
The R&D Tax Credit is one of the most significant tax incentives remaining under current tax law – a substantial tool for maximizing a company’s cash flow and bottom line.
Our R&D Tax Credit practice consists of engineers, CPAs, and attorneys who have extensive experience conducting R&D Tax Credit Studies at both the federal and state level. Our process begins with a free assessment to ensure that the company qualifies for the credit and would be able to utilize them. Each of our studies includes a site visit to help facilitate the study process. We also include audit support for all of our studies. This is a conservative federal and state incentive that was just made permanent by Congress as part of the 2015 PATH Act. Contact ETS for more information at 609-915-1607 or email gkimmel@engineeredtaxservices.com
