R&D Credit- Game Changer for Manufacturers

The R&D credit is a boon for companies involved in research. But do you know this big tax break is also intended to boost domestic manufacturing? Many manufacturers have an outdated understanding of the R&D tax credit laws and the financial incentive is not limited to white collar research only.

Despite the name Research and Development, the tax incentive extends beyond basic research to include applied research. The tax credit is also available for manufacturers who want to improve their manufacturing process to make it efficient and environmentally friendly. So, you may wonder what manufacturing activities are covered under the new R&D credit scheme. Here is the list.

Qualifying Manufacturing Activities

Listed are examples of manufacturing activities that are considered as qualifying research activities.

· Improving product quality

· Developing product design using CAD

· Optimizing manufacturing processes

· Development of improved/2nd generation products

· Designing of manufacturing equipment

· Designing cost-effective operational processes

· Alternative material testing process alternatives

· Designing, building and testing prototypes

· Integrating new materials to improve product quality and performance

· Increasing production capacities and manufacturing capacities

· Meeting compliance with changing emission regulations

If you still find the research activities confusing, try answering the questions below.

· Does your company resolve technical challenges through innovative processes and use of products?

· Is your company involved in activities related to process design and development?

· Is your company involved in using innovative materials to create energy-efficient and reliable products and processes?

If the answer to any question is a Yes, it means your company is eligible to receive R&D credit. To get a better understanding of qualified research activities, you need to think in terms of formulas, testing out new building materials, processes, software, and design of any new project involving electrical or mechanical systems.

The information given above makes it quite clear when it comes to determining the eligibility of research activity for R&D credit. Now let’s see how it is calculated.

R&D Calculations

The R&D credit is calculated in any one of the following two ways-

Regular Credit:

Older companies can claim higher tax credit by comparing current year’s research expenses with a base amount that is an average of research expenses incurred from 1984-1988.

Alternative Simple Credit:

Other companies need only three years of prior data to calculate the base amount. While the Alternative Simple credit has lower credit rate, it can still help companies to reclaim a good amount through an R&D tax credit.

When Can Manufacturing Companies Apply for Credits?

Applying for R&D tax credits depends on your company’s tax filing deadline. However, the R&D tax credits can be carried forward to a period of 20 years. The extension of the tax credits and the carry forward condition changes with every State.

Expansion of Benefits

The PATH legislation introduced by Congress in 2015 made the R&D credits permanent. The tax incentive scheme was extended to startups and small businesses which were not eligible earlier as they paid Alternative Minimum tax.

Not Just for the Big Companies

The new changes introduced in the R&D credit laws enable the small and medium businesses involved in manufacturing on a small scale to get the benefits like the big manufacturers. The new provision enables companies with $50 million or less in gross receipts to apply for a tax credit under AMT.

Under the new provision, Qualified small businesses can use all of the year credit, use part-credit or carry the unused tax credits forward against payroll tax (http://www.wikihow.com/Pay-Payroll-Taxes).

R&D Credit – A Tax Savings Tool for All Manufacturers

It is not only the primary manufacturer who can claim tax savings. Even secondary manufacturers who make products for OEM can claim R&D credits.

For example, if a big car manufacturer has given a small manufacturing company a contract to develop parts and prototype based on its design, the small manufacturing company can also claim R&D tax credits as it plays a big role in quality, functionality, and reliability of the parts that will be used in the final assembly of a car.

The R&D tax credit is a game changer for manufacturers as it allows them to claim a part of funds spent on research activities and make the bottom line stronger. Since the eligibility requirements are clearly defined, all they need to do is identify and document research activities to claim R&D credit.


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