The Research Tax Credit: An Underused Asset for Manufacturers
There are more than 630,000 manufacturing businesses in the US, yet only 30% are claiming the Research Tax Credit (R&D Tax Credit). Despite being highly qualified, the manufacturing industry has several misconceptions about the R&D Tax Credit and how it works. Some companies are unaware of the program, others are unsure of what could qualify, and most do not know how to prepare the credit.
What is the Research Tax Credit?
The Research Tax Credit (RTC) is available to companies who are developing or improving products, processes, techniques, formulas, inventions or software. You could easily qualify for the RTC if your business is related to technology, industrial production and design, but also machine shops, tool and die shops and custom machine manufacturers can have strong claim profiles.
This dollar-for-dollar credit can be used against your federal income tax liability which means that companies can get a dual benefit on their tax returns, the deduction in the year the expenditure is incurred, as well as by claiming the Research Tax Credit. In some cases, the credit can be used against your payroll tax liability.
Examples of Qualified Research Activities
Product development, tooling designing, rapid prototyping, weldment or custom fixturing configuration are all great examples of work that could qualify for the R&D Tax Credit. First article inspections to prove that part geometry and tolerances can be achieved within a repetitive and reproducible manner can also qualify. Any work that involves overcoming technical uncertainty relating to the part design or the fabrication process or manufacturing techniques that can be utilized to meet the end specifications can qualify. Improvements to yield, throughput, functionality, performance or quality are all great examples of work that entitles you to the R&D Tax Credit.
In some cases, machine shops don’t own the rights to the product being fabricated but they are the ones developing the process, the fixtures or tooling, the automation or the techniques to machine multiple parts to meet tolerances, volumes or specifications. This development of new or improved process or technique qualifies for the R&D Tax Credit. Other examples include:
- Designing or building tooling or equipment
- Changing or upgrading your manufacturing processes
- Developing custom or “one-off” tooling and fixture design
- Producing prototypes, 3-Dimensional drawings or samples
- Trying to make your processes or products more efficient, economical, durable or stronger
- Introducing some automation into the processes
- Trying to reduce scrap rates or improve throughput
- Employing engineers, technologists, CAD drafters or other technical disciplines
- Manufacturers using autonomous robots to transport parts between assembly stations
- Testing new mold/die designs that were engineered and developed through additive manufacturing
- First Article Inspections of new parts
- Rapid prototyping or soft-tooling
The Future of Manufacturing – Materials, Automation, Robotics
As we make the transition from Industry 4.0 to Industry 5.0, many companies will be adjusting and improving their use of technology, materials, communications, robotics and more to increase efficiency and to compete internationally. These changes to product development and process development may make companies eligible for the R&D Tax Credit.
For instance, in the past decade, many companies in the automotive industry have made the move from supplying steel to aluminum parts. While it may have seemed like a simple switch to some, the inherent differences between the two materials posed some challenges to manufacturers. To not risk the structural integrity of the products, manufacturers needed to figure out how to adjust either the thickness of the material or the profile shapes. These modifications then resulted in the need for companies to change the way their machines handled the material to prevent damage, such as bending or scratches on the surface. As a result, manufacturers had to change their processes so that they could adjust to the new material.
The bottom line is that these changes—whether a result of new technology, new material, introduction of robotics—and all the effort that goes into making these changes qualify for the R&D Tax Credit.
About the Authors
Dan Osterland has 20 years of experience consulting businesses large and small, with eight years focused on corporate taxation at Bloomberg Industry Group (formerly Bloomberg BNA). He went on to be a technical consultant to law firms advising them on technology utilization to maximize efficiency. Prior to that, he worked with public accounting firms and their clients in the areas of HR and benefits. He may be reached at 248-379-4188 or firstname.lastname@example.org.
Diane Stogiannes is the President of DST Advisory Group. She has over 15 years of consulting experience with R&D Tax Credits, servicing Clients in both Canada and the United States. She may be reached at 248-443-3361 or email@example.com.
DST’s technical team is comprised of engineers, with specific experience in manufacturing. Coupled with their legal and tax team, they can construct a solid claim based on engineering facts, supported by legislation and regulations to help you maximize your legitimate Research Tax Credit claim.
DST Advisory Group is an MMA Premium Associate Member and has been an MMA member company since September 2021. Visit online: dstadvisorygroup.com.