The Research and Development tax credit is often an overlooked benefit for businesses. The R&D credit provides dollar-for-dollar cash savings each year for manufacturing companies performing activities related to the development of new or improved products and processes.
Manufacturers frequently invest a significant amount of money in new products, processes, and packaging. They must utilize the tax benefits that are available to them. R&D tax credits aren’t a silver bullet but if used strategically, the incentives offer a powerful support mechanism.
Now is the time to ensure you’re realizing the full potential of an R&D tax credit. Some potential benefits of this include:
- Increased R&D
- Expand production facilities
- Provide much-needed cash to hire additional employees
Is your Manufacturing Company qualified for R&D Tax Credit?
Qualifying R&D can be found across a diverse range of manufacturing businesses. To be eligible for the R&D tax credit, a manufacturer does not need to have a research lab.
Instead, the company may qualify if they have:
- Process improvement initiatives
- Product and process engineering
- Time spent on the value engineering stage of each job
- Supplies – Prototypes, test production runs, custom tooling
- Bid time related to fine-tuning technical specifications and design requirements
- Production for prototypes, first articles, custom tooling, and trial production runs
On the other hand, the following are non-qualified R&D:
- Bid time unrelated to technical issues
- All time and materials spent on repeat production
Applying the Four-Part Test
Eligible qualified research activities (QRAs) must also meet all the criteria established in the 4-part test:
- Permitted Purpose – Requires that the research include activity aimed at creating or improving a product or process to increase function, performance, dependability, quality, or cost-efficiency.
- Elimination of Uncertainty – The manufacturing company must demonstrate a process of experimentation that is used to eliminate or resolve technical uncertainty. throughout the process, Various alternatives and techniques are assessed using modeling, simulation, trial and error, prototyping, and other methods
- Process of Experimentation – Requires activity that is used to eliminate technical uncertainties during the development of a product or process involving methodology, design, techniques, formulas or inventions.
- Technological in Nature – Hard sciences must be used in the experimentation procedure (engineering, physics, biology, chemistry, computer science).
Defense Contractor Case Study
- Local firm claimed research credits for the past several years
- The firm claimed qualified costs related to a company division dedicated entirely to research
- The firm omitted QREs for the main part of the business because of complexities with contract research and prototypes
- The client had a banner year in 2020 and wanted to offset a large tax bill coming due
| Credits Using Original Methodology 2017-2020 TOTAL | Credits Using Revised Methodology 2017-2020 TOTAL | |
| Federal QREs | 994,954 | 4,975,167 |
| Utah QREs | 994,954 | 4,975,167 |
| Federal R&D Credits | 75,816 | 421,880 |
| Utah Research Expense Credits | 74,622 | 373,138 |
| Utah Incremental Credits | 24,874 | 167,193 |
| Total Credits Generated | $175,311 | $962,210 |
| DIFFERENCE | 2017-2020 TOTAL |
| Federal QREs | 3,980,213 |
| Utah QREs | 3,980,213 |
| Federal R&D Credits | 346,064 |
| Utah Research Expense Credits | 298,516 |
| Utah Incremental Credits | 142,319 |
| Total Credits Generated | $786,899 |
If you’re looking for experts to help you determine if your business activities qualify for R&D Tax Credit, KPT Consulting is here to help.
