Feature Story: R & D Tax Credits

May 9, 2017 No Comments
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Are you leaving money on the table?

by John Madsen

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toc_features50pxAs many Midwest manufacturers actively look for business opportunities to improve their profitability or their bottom line, one of the most overlooked resources is the ability to use Research and Development (R&D) tax credits.

“I am amazed how many manufacturers do not realize or understand the IRS’s definition of R&D tax credits,” said Benjamin Rashleger, President and CEO of WSI Industries, after he successfully obtained credits for his company. “If you make or improve a product or a process, either for yourself or your customer, you have activities that qualify for the R&D tax credit. This credit can substantially reduce your federal and state tax liabilities.”

Still, many manufacturers do not believe they have R&D activities taking place in their facilities. If you quote jobs, take orders, build tools, produce products, and sell them to your customers, you almost certainly have R&D activities.

The R&D tax credit is a dollar-for-dollar reduction off your tax liability that provides potentially significant sources of unexpected cash for manufacturers of all sizes, including custom manufacturers that have incurred expenses in pursuit of new or improved products or processes.

According to Black Line Group, the regulatory definition of R&D remains much broader than most businesspeople realize. For example, labor and supply cost spent prototyping, or using your resources and equipment; costs incurred to quote or experiment with different designs and materials; the design/engineering of new parts and or the process to make new parts; designing or developing tools, including mold tooling, dies and fixtures; and activities related to software development can all potentially generate R&D tax credits.

Manufacturers of all kinds, including those that design and develop their own products, as well as contract manufacturers and job shops, all can take advantage of the R&D tax credit. Both the customer and vendor (job shop/contract manufacturer) of an R&D part can take the credit. The customer will have qualified expenditures around the “PRODUCT” development/improvement activities of the part or component, and the vendor will have qualified expenditures associated with developing the “PROCESS” for making the part.

If you are unsure of how to navigate or don’t even know where to start to see if you qualify for Research and Development (R&D) tax credits, you are not alone. Long-time Minnesota business owner, Tom Chacon, of S & T Chacon LLC and formerly of Boring Machine, said, “I was skeptical when I first learned of the R&D tax credits. My company did not have what I thought were true R&D activities. I was a job shop just making tools and parts for my customers. After I learned about the R&D tax credit process, my company enjoyed receiving tens of thousands of dollars every year in credits. It was like free money to reinvest in my business.”

IMPACT OF PATH ACT
If your company is involved in product manufacturing, product engineering, or creating or improving the performance, reliability, or quality of a process, you are on your way to qualifying for R&D tax credits.

Until 2016, the reality was that many small and mid-size manufacturing companies (SMM) and their CPA/tax advisors felt it was simply not viable to pursue the tax credit due to specific limitations in the tax code. But, this situation changed in late 2015 when the PATH Act (Protecting Americans from Tax Hikes) was signed into law. That legislation, in addition to making the tax credit permanent for the first time in the credit’s 35-year history, significantly enhanced how small and mid-sized manufacturers can benefit from the research tax credits they generate, utilizing the following significant provisions:

  • Eligible SMM’s may now claim the credit against the Alternative Minimum Tax (AMT) to offset AMT for tax years beginning after December 31, 2015.
  • Some start-up companies may offset payroll taxes with the credit. In tax years beginning after December 31, 2015, certain start-up companies will be allowed to utilize the research credit to offset the employer’s payroll tax (i.e., FICA) liabilities.

How are these changes significant? In years’ past, many eligible SMM’s (especially S Corporations and other flow-through entities) did not pursue the R&D tax credit because the Alternative Minimum Tax (AMT) prevented them from using the R&D tax credits they could generate. In addition, business owners of young companies typically didn’t have a need for tax credits because their expenditures are higher than their sales, thus creating operating losses. Both new changes will allow a higher number of companies to immediately monetize the credits they generate.

The R&D tax credit is one of the most generous incentives to help business reinvest. If you are looking to add value and fund improvement projects, then learning more about the R&D tax credit could be the single most profitable thing you do for your business in 2017.  pm_endmarkblue-e1320337140493


 

JOHN MADSEN is a MPMA Board Member and is Vice President of Consulting Manufacturing R&D Tax Credits at Black Line Group. He can be reached at John@blacklinegrp.com or 763-746-1265.

Copyright © 2017 Minnesota Precision Manufacturing Association. For permission to use or reprint this article please contact Nancy Huddleston, publications manager for Precision Manufacturing Journal.

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