What is in this article?:
- Don't Self-Censor: Why You Should Be Taking Advantage of the R&D Tax Credit
- Why Is the R&D Tax Credit So Underutilized?
Businesses in the manufacturing industry are constantly pushing ahead to improve the process of making and producing goods. However, doing this while dealing with budget restraints and sometimes less than exemplary profit margins can be enough to put some companies in a tailspin. Using innovation to move forward requires a good deal of research and development before implementation.
There is a government-sponsored incentive, the Research and Development (R&D) tax credit, which rewards companies for using research and development to maintain their competitive edge. Large companies have been taking advantage of the R&D tax credit for years; however, many small and mid-sized businesses are completely unaware of the qualifying activities that enable them for this credit.
“The federal R&D credit has been around for several decades and has become more generous over the years,” alliantgroup Vice Chairman and former IRS Commissioner, Mark W. Everson explains. “Businesses that did not qualify in the past may very well be able to claim these credits now because, in 2003, the U.S. Treasury modified the documentation requirements, changing the definition of qualifying activities. R&D is no longer limited to a development or invention that is new to the marketplace or world, just new to your business.”
One of the biggest motivating factors for businesses of any size to seek out the R&D tax credit (aside from the financially beneficial aspect) is that they can claim the benefit for all open tax years—typically the last three years plus the current year. This credit could be carried forward for up to 20 years, often resulting in hundreds of thousands of dollars for the company.
There are several prime examples of companies in the manufacturing industry that have benefitted from the R&D credit. Listed below are companies in four different sectors of manufacturing that took advantage of this lucrative opportunity to claim the credits to which they were fully entitled.
- A plastics injection moldingcompany with over $5 million in annual sales received $650,000 in federal credits because of the process of researching and developing the design and ultimately, the mold for a particular product.
- A softwarecompany with an annual sales average of over $2 million was eligible for $70,000 in both federal and state tax credits for developing weather prediction software.
- A machine shop and repair serviceaveraging $4 million in annual sales was given $112,000 in federal credits and $53,000 in state credits for their business for certain normal day-to-day activities like product testing and stress analysis.
- An apparel and textiles firm with an annual revenue of $202 million qualified for $450,688 in federal tax credits for the design and development of new and improved apparel products for fit, functionality and quality.
These are but a few examples of the types of results seen by companies in the manufacturing industry. Each company was able to claim these credits because of the varying types of qualifying activities that allowed for their eligibility. As you can see, the activities are not the typical Research and Development that most people think of -- definitely none that require years of research in a laboratory.