R&D Tax Credit for Manufacturers

2024-07-09

The Research & Development (R&D) tax credit is a powerful savings tool for eligible research projects. Unfortunately, many do not take advantage of the incentive due to the incorrect assumption that the business has no qualifying activities. A popular myth has been debunked: the R&D tax incentive is only for large companies that employ scientists … Continued

The Research & Development (R&D) tax credit is a powerful savings tool for eligible research projects. Unfortunately, many do not take advantage of the incentive due to the incorrect assumption that the business has no qualifying activities. A popular myth has been debunked: the R&D tax incentive is only for large companies that employ scientists or other technical professionals. While those with formal R&D functions certainly qualify, it does not mean others are ineligible. Companies across various industries have claimed and leveraged this robust credit, including manufacturers.

It is often surprising that several tasks many manufacturing companies undertake qualify. This includes developing new or improved parts or products, time spent automating, or developing processes designed to increase efficiency. In addition, the time spent integrating new fixtures, tooling, and machine programming are also eligible. Don’t forget about prototype testing and development and the technical review of CAD detailing or shop drawings. In other words, there are many eligible activities. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.

What is the R&D Tax Credit?

It’s a federal tax incentive available to businesses developing new or improved components (e.g., products, processes, techniques, or formulas) that result in improved functionality, performance, or reliability. The incentive is popular because it is a dollar-for-dollar credit that can provide significant tax savings. Additionally, there are similar state-level versions of the credit, including one in California and Texas.

Which Manufacturers are Eligible?

Any manufacturing company that conducts qualifying R&D activities is eligible. This includes product manufacturers, tool and die manufacturers, machine shops, custom parts, precision metal plastics, and system integrators. In addition, structural steel and miscellaneous metal, fabricators, and other product manufacturers, from specialized formulations for coatings, chemicals, feed, or concrete to automobile or aerospace products, may also qualify.

What Manufacturing Activities Qualify?

When determining whether an activity is eligible, applying the Four-Part Test is necessary. This includes ensuring the research conducted is technological in nature, intended to develop a new or improved business component, part of an experimentation process, and eliminated uncertainty about the capability or method of a product/process or process design. Many assume that for a project to qualify, it must result in innovative or breakthrough ideas or that the research must be successful. Surprise – this is not true. The bottom line is an activity must only be new or improved for the company.

Several manufacturing activities often qualify for the federal credit. These include developing new or improved products, creating/testing product mockups and prototypes, and in-house drafting services, including CAD, BIM, or shop drawings. In addition, integrating equipment and other technologies to automate a process, evaluating alternative techniques to develop products (e.g., welding techniques), and determining machinery, speeds, tooling, and fixtures through trial and error can also qualify.

What Project Expenses Qualify?

Various expenses qualify, determined by the specifics of the activity. However, common expenses include employee wages, certain third-party vendor costs for testing or providing technical services for new or improved products, and supplies used, consumed, or scrapped during the development process.

There are two important points to note. First, any activities and expenses conducted after the development process has ended do not qualify. Second, anything that was developed before or minor modifications or customization of an existing product is typically ineligible.

What are the Documentation Requirements?

Maintaining and compiling relevant documentation is critical in the claim process. This includes payroll information (such as wages and employee job titles), general ledger or job costing reports, quotes, invoices, purchase orders, bill of materials, and project documentation, such as initial and revised drawings, shop travelers, and meeting notes.

The key is keeping records that show revisions or changes made through the product development and manufacturing process and the alternatives evaluated. These can include product specifications, customer-provided drawings, technical specifications for materials and products evaluated, and iterations for drawings used in the process. In addition, it is important to retain all meeting notes, email correspondences, and other communications.

Contact Us

The Research & Development tax credit is a valuable tax savings opportunity that can create significant savings for manufacturing companies. Since the regulations can be technical, it is important to consult with a qualified advisor who can evaluate your project. If you have questions about the information outlined above or need assistance claiming the R&D credit, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.