Manufacturing Research & Development Tax Credit Study
How can manufacturing qualify for the R&D tax credit?
The R&D tax credit (officially “Credit for Increasing Research Activities”) is a dollar-for-dollar reduction to your tax liability and can amount to large savings, not just this year, but retroactively as well. Despite being a huge benefit to manufacturing companies around the country, the credit is often overlooked by both big and small companies. From pre-bid meetings and concept development to prototypes and pilot models, there are qualified activities throughout the manufacturing process. Our R&D credit specialists stay current with relevant IRS whitepapers, regulations, and case law. This accounting and legal knowledge coupled with extensive experience working with engineering, manufacturing, and product development companies give us the expertise to assist any manufacturing company with their R&D credit claim.
The internal revenue code, section 41, outlines the requirements for the R&D credit, however, the high-level requirements for an activity to qualify can be summarized by the “four-part test” as explained in the right column.
If your activities satisfy this four-part test, the associated wages, supply costs, and/or third-party contractor expenses could qualify towards the tax credit. We often see the credit amount to 10% of those qualified expenses.
In 2019, Calvetti Ferguson completed a 2015-2018 R&D tax credit study for a trailer manufacturing corporation in Texas. The company averaged $45M in gross receipts and $9M in payroll across those study years. Over the course of that time period, the Company had approximately $4,000,000 in qualified wages associated with a wide variety of qualified activities.
As a result of an R&D study through Calvetti Ferguson, the Company saved nearly $245,000 in Federal income tax and $125,000 in Texas Franchise Tax. The activities undertaken by the client included but was not limited to the following common activities.
Example of qualified activities for manufacturing
If an operations manager ($100,000 in 2020 wages) spent the entirety of 2020 evaluating how to improve the speed and reliability of a particular manufacturing line for a new product, the tax credit for their development efforts could amount to $10,000. Furthermore, if the employee assisted in the manufacturing of a prototype and the raw materials associated with the prototype amounted to $50,000 you could be eligible for an additional $5,000 in tax benefit, or a combined $15,000.
All employees involved in the development efforts associated with the purpose of improving the manufacturing process or developing the prototype are eligible for the credit. From meetings with Customers to discuss the specifications and requirements of their product to testing the materials used in the prototype, a variety of activities and expenses associated with the development efforts can be taken via the R&D tax credit.
While the scenario highlights the benefit attributable to the activities of one employee, an R&D study evaluates the entire company’s operations, often resulting in hundreds of thousands in tax savings/refunds. Our study process is unobtrusive and thorough to ensure you get the credit you deserve, while also staying within the letter of the law.
Commonly qualified activities:
- Development of manufacturing processes associated with new product fabrication and assembly
- Adjustments to current manufacturing lines to improve manufacturing performance (speed, precision, labor required, etc)
- Purchase of new equipment to add new functionality or improve existing lines
- Design and development of molds, dies, jigs, and fixtures for prototype and production
- Automation of equipment to improve efficiency, improve quality, and/or improve safety
- Building expansions to increase capacity or add new capabilities
- In-house tool and fixture design and development (non-project specific tooling, rack, equipment development to improve the functionality of warehouse or manufacturing space)
- Adjustment of the manufacturing process to reduce labor costs/manufacturing time
- Development of process improvements to improve manufacturing quality
Four part test:
- Technological in nature: Development must rely on the principals of a hard science (mechanical/ electrical/industrial engineering, physics, biology, chemistry, etc.).
- Permitted purpose: Must develop a new or improved product, manufacturing/assembly process, formula, invention, software, or technique for the purpose of performance, functionality, quality, or reliability.
- Eliminate uncertainty: During the development of the “business component”, you must encounter uncertainty regarding the final design, methodology of achieving desired outcome, or capability of achieving the desired outcome.
- Process of Experimentation: To overcome the uncertainty, you must evaluate one or more alternatives in a systematic way. often times this is done via systematic trial and error, modeling, simulation, and/or software (such as SolidWorks, AutoCAD, etc).
Calvetti Ferguson works with mid-market companies, nonprofit organizations, and high net worth individuals across the country. Regardless of the complexity of the compliance, assurance, advisory or accounting need, our team stands ready to assist you. Please complete the form below, and we will follow up with you shortly.