Telephone
517-372-5900

We have updated MyMMA. Create a new account with your company e-mail. Call 517-487-8551 or e-mail cooke@mimfg.org with questions.

Menu

 

R&E Tax Credit is a 'Smart' Incentive for Industry 4.0 Companies to Improve Financial Performance

This article appeared in the March 2019 issue of MiMfg Magazine. Read the full issue and find past issues online.

The Research & Experimentation (R&E) tax credit, also known as the R&D tax credit, has given businesses a powerful tool to strategically improve their bottom line, but it is often overlooked or unclaimed. In reality, there has never been a better opportunity for “smart” manufacturers in the Industry 4.0 era to explore and capitalize on these cash savings.

The R&E benefit is available for the development or improvement of products, processes, techniques, formulas, inventions or software and is a dollar-for-dollar credit against the taxpayer’s federal income tax liability, which means companies may get a twofold benefit—the deduction in the year the expenditure is paid, as well as by claiming the tax credit.

Excellent candidates for the R&E tax credit are businesses related to technology, industrial production and design, but also some machine shops, tool and die shops, and custom machine manufacturers. That’s why S-corporations, start-ups and partnerships in the business of improving industrial production processes should consider the R&E tax credit. Unfortunately, many of these businesses are prematurely thinking about converting to a C-Corp structure under the new tax law instead.

Before a change in structure, additional factors should be considered, such as whether the business qualifies for the pass-through deduction; if the business generates research credits; whether the business will pay dividends to its owners; and the long-term exit strategy of the business. Because R&E credits generated by a business can be used to offset any income generated from that same business activity, converting to a C-Corp may not be the best solution.

Examples of Qualified Research Activities (QRAs) under the R&E credit include:

  • Providing custom control and automation solutions for various applications
  • Developing new functionality or performance to meet customer specifications
  • Development of schematic drawings for integration of system components
  • Designing and developing cost-effective and innovative operational processes
  • Developing new tool-specific fixturing or other tooling
  • Improving processes through robotics or other types of automation techniques
  • Experimenting with new alloys or other materials
  • Testing new mold/die designs through sampling or trial
  • Providing product and system solutions, including design engineering and mechanical fabrication
  • Performing evaluations and system test
  • Implementation of automated systems

There may also be Qualified Research Expenditures (QREs) if companies can substantiate how the expenditures are connected to the qualified activities, including:

  • Qualified Wages of Employees performing, supervising and supporting qualified activities
  • Supplies used to fabricate prototypes/items consumed during the conduct of research
  • Contract Research–65 percent of fees paid to outside consultants/subcontractors/ engineers/software developers
  • Estimates are allowed, however documentation of how the estimates were determined must be provided and reasonable methods must be used

Tax savings can be extensive. For companies who have adopted an Industry 4.0 approach, it’s worth it to take a second look at their qualified research activities to make sure they are receiving all the tax savings available to them.


Premium Associate MemberClayton & McKervey, P.C. is an MMA Premium Associate Member and has been an MMA member company since February 2018. Visit online: www.claytonmckervey.com.

About the Authors

NAMETimothy P. Finerty, CPA is a shareholder with Clayton & McKervey, P.C. He may be reached at tfinerty@claytonmckervey.com.

 

NAMESarah E. Russell, CPA, MBA is a shareholder with Clayton & McKervey, P.C. She may be reached at srussell@claytonmckervey.com.

This article appeared in the March 2019 issue of MiMfg Magazine. Read the full issue and find past issues online.

The Research & Experimentation (R&E) tax credit, also known as the R&D tax credit, has given businesses a powerful tool to strategically improve their bottom line, but it is often overlooked or unclaimed. In reality, there has never been a better opportunity for “smart” manufacturers in the Industry 4.0 era to explore and capitalize on these cash savings.

The R&E benefit is available for the development or improvement of products, processes, techniques, formulas, inventions or software and is a dollar-for-dollar credit against the taxpayer’s federal income tax liability, which means companies may get a twofold benefit—the deduction in the year the expenditure is paid, as well as by claiming the tax credit.

Excellent candidates for the R&E tax credit are businesses related to technology, industrial production and design, but also some machine shops, tool and die shops, and custom machine manufacturers. That’s why S-corporations, start-ups and partnerships in the business of improving industrial production processes should consider the R&E tax credit. Unfortunately, many of these businesses are prematurely thinking about converting to a C-Corp structure under the new tax law instead.

Before a change in structure, additional factors should be considered, such as whether the business qualifies for the pass-through deduction; if the business generates research credits; whether the business will pay dividends to its owners; and the long-term exit strategy of the business. Because R&E credits generated by a business can be used to offset any income generated from that same business activity, converting to a C-Corp may not be the best solution.

Examples of Qualified Research Activities (QRAs) under the R&E credit include:

  • Providing custom control and automation solutions for various applications
  • Developing new functionality or performance to meet customer specifications
  • Development of schematic drawings for integration of system components
  • Designing and developing cost-effective and innovative operational processes
  • Developing new tool-specific fixturing or other tooling
  • Improving processes through robotics or other types of automation techniques
  • Experimenting with new alloys or other materials
  • Testing new mold/die designs through sampling or trial
  • Providing product and system solutions, including design engineering and mechanical fabrication
  • Performing evaluations and system test
  • Implementation of automated systems

There may also be Qualified Research Expenditures (QREs) if companies can substantiate how the expenditures are connected to the qualified activities, including:

  • Qualified Wages of Employees performing, supervising and supporting qualified activities
  • Supplies used to fabricate prototypes/items consumed during the conduct of research
  • Contract Research–65 percent of fees paid to outside consultants/subcontractors/ engineers/software developers
  • Estimates are allowed, however documentation of how the estimates were determined must be provided and reasonable methods must be used

Tax savings can be extensive. For companies who have adopted an Industry 4.0 approach, it’s worth it to take a second look at their qualified research activities to make sure they are receiving all the tax savings available to them.


Premium Associate MemberClayton & McKervey, P.C. is an MMA Premium Associate Member and has been an MMA member company since February 2018. Visit online: www.claytonmckervey.com.

About the Authors

NAMETimothy P. Finerty, CPA is a shareholder with Clayton & McKervey, P.C. He may be reached at tfinerty@claytonmckervey.com.

 

NAMESarah E. Russell, CPA, MBA is a shareholder with Clayton & McKervey, P.C. She may be reached at srussell@claytonmckervey.com.
Mfg Excellence Awards 2017
Events
Mfg Excellence Awards 2017
This program recognizes excellence in manufacturing by honoring those who make a positive impact in their community and in their industry.
MFG Forum 2017
Events
MFG Forum 2017
The 2017 MFG Forum will outline the threats, discuss best practices and provide resources for protecting valuable manufacturing assets from cyber attack.
MFG Forum 2018
Events
MFG Forum 2018
The MFG Forum guides industry leaders through emerging issues like Industry 4.0 and provide resources to maintain Michigan’s manufacturing advantage in the 21st century.
Insurance Forms
Insurance, Internal Page
Insurance Forms
Download and print the forms you need to manage your benefits program.
Manufacturers Recognize Vantage Plastics for Community Impact
News
Manufacturers Recognize Vantage Plastics for Community Impact
MMA is proud to announce that Standish’s Vantage Plastics has been selected as the 2017 recipient of the MFG Community Impact Award.
Manufacturing’s Plan for Michigan
Advocacy
Manufacturing’s Plan for Michigan
Michigan’s economy is growing — but more remains to be done. Discover the industry’s top priorities for the 2017-2018 Legislative Session and help keep manufacturing moving forward.
Building a Competitive Michigan
Advocacy
Building a Competitive Michigan
MMA legislative and regulatory successes have saved Michigan manufacturers billions of dollars in recent years.
Reduced UI Taxable Wage Base Available in 2018
Advocacy
Reduced UI Taxable Wage Base Available in 2018
Eligible employers will qualify for a reduced taxable wage base of $9,000 for calendar year 2018 thanks to MMA-supported legislation passed in 2011.