The Research & Development tax credit remains one of the most underutilized tax-savings opportunities for manufacturers and other companies. Businesses across the U.S. are receiving thousands to millions of dollars by taking advantage of the R&D tax credit. Unfortunately, there still are many companies that are not fully benefiting from the credit because of misconceptions and uncertainty about applicability.
Many taxpayers view the R&D tax credit as available only for large companies, or those in high-tech industries. That’s not true. The federal R&D tax credit provides tax incentives to taxpayers that invest resources in the development of new products or processes for the improvement of current products or processes … regardless of the industry.
Though the credit has been around since the early 1980s, new laws and regulations have expanded the benefit of the credit for numerous industries. If your business is doing any of the following, there is an excellent chance that it qualifies for the credit:
- Manufacturers products
- Develops software
- Designs tools, dies, fixtures or jigs
- Develops new, improved or more reliable products or manufacturing processes
- Develops new formulas
- Employs the production part approval process (PPAP) to get new products to market
If an activity qualifies for the R&D credit, companies may apply the cost of wages, supply costs and outside contractor services associated with the activity toward the credit.
Companies that develop their own tooling — especially in the plastics, tool and die, and industrial machinery manufacturing industries — are seeing significantly higher R&D credits because of recent taxpayer-friendly pronouncements. Therefore, if you are a plastic or tool and die business and you are developing your tooling internally, there is substantial authority to include the expense of the mold or tool and die in your R&D supply expenses — regardless of whether the tooling becomes customer-owned tooling or the company retains ownership.
Proper documentation is critical for supporting an R&D credit claim with taxing authorities. Lack of historical records can be remedied in most situations, so it’s important to work with a tax expert who specializes in this area.
The R&D tax credit is a tremendous avenue for many businesses to reduce their tax liabilities. Understanding what qualifies, and how to document it, is the first step for business owners who can stand to benefit greatly from the R&D tax credit.