Common Misconceptions About the Research & Development Tax Credit
The research and development (R&D) tax credit is a potentially lucrative government incentive designed to promote innovation and technological advancement across multiple U.S. industries, including manufacturing. First launched in 1981, the R&D tax credit has survived over four decades of legislation and iterations. As a result, many manufacturing companies often have many questions and misconceptions about how this tax program can impact its operations. Here are six of the most common R&D tax credit misconceptions many manufacturing companies face and the current facts about this government-endorsed benefit.
R&D Tax Credit Misconception #1:
Limited to High-Tech Industries
Many manufacturing companies assume that they can’t participate in the R&D tax credit process because they aren’t software developers or working in a traditionally high-tech industry. Fortunately, this is not the case. The R&D tax credit extends beyond high-tech industries and is applicable to manufacturing companies across various sectors. It is not limited to specific industries and can be claimed by any business engaged in qualified research activities.
R&D Tax Credit Misconception #2:
Exclusive to Laboratory Research
Yes, just the mere mention of the phrase “research and development” conjures up images of scientists in lab coats — but claiming the credit does not require access to a lab or lab research. While laboratory research is commonly associated with the R&D tax credit, it is not a prerequisite. All qualifying activities must pass a specific 4-part test, regardless of whether they occurred in a lab or anywhere else. Manufacturing companies can qualify for the credit through various activities, including developing manufacturing processes, improving product designs, creating prototypes, and conducting testing and analysis.
R&D Tax Credit Misconception #3:
Reserved for Major Corporations
Another common misconception about the R&D tax credit is that only big brands or major corporations can participate in the program. This is also incorrect. The R&D tax credit is available to companies of all sizes, including small and medium-sized manufacturing enterprises (SMEs). It was specifically designed to support innovation in businesses of all scales.
R&D Tax Credit Misconception #4:
Success of Innovations Required
Many companies assume that the research and development program only rewards successful projects and initiatives. Not true. Claiming the R&D tax credit does not depend on the success or marketability of innovations. Instead, the viability of the program focuses on the process of research, development, and improvement. Put simply, it’s not about success or failure when claiming the credit. Even if a project doesn't yield the desired outcomes, the associated expenses can still be eligible for the credit.
R&D Tax Credit Misconception #5:
Complex and Time-Consuming to Claim
Sometimes, even manufacturing companies that know they could claim the R&D tax credit don’t because they believe they don’t have the time to navigate a complex and time-consuming process. Yes, like most tax legislation, the R&D tax credit does have some complexities. However, a specialized R&D tax firm can assist manufacturing companies in identifying and documenting qualified research activities. Partnering with experts streamlines the claiming process and reduces the burden on internal resources.
R&D Tax Credit Misconception #6:
One-Time Benefit Only
Finally, many manufacturing businesses who have already claimed the R&D tax credit think it’s a one-time benefit only. The R&D tax credit is not a one-time benefit. It can be claimed annually as long as a company continues to engage in qualified research activities. This provides ongoing opportunities for manufacturing companies to reduce tax liabilities and reinvest the saved funds into further R&D efforts.
Does Your Manufacturing Company Qualify for the R&D Tax Credit?
Qualifying manufacturing companies should not miss out on claiming the R&D tax credits and tapping into the financial benefits this program offers. Understanding common misconceptions about this program can help ensure as many manufacturing companies as possible capitalize on this credit.
About the Author
Dan Osterland is a Senior Manager-Business Development for Acena Consulting, LLC. He can be reached at 248-379-4188 or firstname.lastname@example.org.
Acena Consulting is an MMA Premium Associate Member and has been an MMA member company since May 2023. Visit online: acenaconsulting.com.