The federal R&D tax credit is a generous tax incentive available to companies that invest in the design of new or improved products, processes, software, techniques, or technologies. Many manufacturing companies are unaware that their day-to-day activities make them eligible for significant tax savings via the R&D Tax Credit.
About the R&D Tax Credit
The R&D tax credit, which was enacted in the 1980s to incentivize innovation in the U.S., can directly reduce a company’s tax bill dollar for dollar. While it is generally a non-refundable credit used to offset income taxes, some early-stage companies can use the credit to offset payroll taxes.
The R&D tax credit is calculated based on the amount of Qualified Research Expenditures (QREs) that a company incurs. QREs can include the following expenses:
- Wages paid to employees involved in R&D;
- Payments to contractors or vendors that provide R&D services;
- Materials used in R&D that are not capitalized or depreciated; and
- Payments for cloud-based development environments or resources.
To be considered QREs, expenses must be paid for activities that meet the following criteria:
- Take place within the U.S.;
- Attempt to design a new or improved product, process, software, formula, technique, or technology;
- Involve technological research (physical or computer science, engineering, biology, etc.);
- Attempt to eliminate uncertainty-related appropriate design, methodology, or capability; and
- Utilize experimentation to evaluate one or more alternative solutions.
How Much Is the R&D Tax Credit Worth?
The federal R&D tax credit is one of the most lucrative tax incentives out there. Generally, it is worth between 5% and 10% of eligible QREs. The larger a company’s investment in innovation and R&D, the larger its R&D credit.
Many states also offer their own R&D tax credit for QREs incurred within that state. The value of state R&D tax credits varies widely but generally ranges between 3% and 15% of eligible state-specific QREs.
In addition to current year R&D tax credits, companies can often claim R&D tax credits from up to three years in the past, providing an avenue to recoup previously paid taxes.
R&D Tax Credit for Manufacturers
Innovation is vital to the success of modern-day manufacturers. To remain competitive, these companies must continuously enhance their product offerings, improve the efficiency and reliability of their production processes, and harness new technologies. Many activities undertaken by manufacturers in pursuit of these goals meet the R&D tax credit criteria and qualify as QREs. The following list is a sample of manufacturing activities that are eligible for the R&D tax credit:
- Computer-aided design (CAD), 3D Modeling and 3D Printing
- Developing new products and improvements to existing products
- Designing, fabricating and evaluating prototypes
- Designing new or improved fixtures, tooling, jigs, and other production aids
- Creating custom manufacturing equipment and automated production processes
- Developing unique CNC or PLC programs
- Experimenting with alternative materials for new or existing products
- Designing new production processes and redesigning existing processes
- “Lean” initiatives intended to increase throughput, reduce machine time, waste and rejects, utilize space more efficiently, etc.
- Creating new or improved physical packaging
- Designing new or improved packaging, filling, or sealing processes
- Creating new software used in production processes
Often, a large portion of the wages paid to product and manufacturing engineers, CNC programmers, machinists and quality personnel will qualify as QREs.
How to Claim the R&D Tax Credit
The R&D tax credit is claimed on a company’s income tax return. Before making a claim, companies must analyze their projects and activities against the R&D tax credit rules. There’s a certain level of documentation required to successfully claim the R&D tax credit, and companies that claim the credit incorrectly could be subject to penalties.
How Can Firestone Help?
Though manufacturing companies are often strong candidates for the R&D tax credit, many companies forgo the benefit because of misconceptions about the credit. Sometimes, companies don’t understand that they aren’t required to develop groundbreaking new products or technologies in order to qualify. Startup companies don’t always realize that they can benefit from the R&D tax credit before they are profitable.
Firestone specializes in helping companies obtain the maximum available R&D tax credit. The R&D tax credit is complex; we cut through the technical tax jargon and invest the effort to calculate and support R&D tax credits in a manner tailored to the way that you run your business.
At Firestone, we use a no-risk, three-step solution that includes a free investigation. Read about this process in detail here.
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