During this pandemic, one of the problems companies face is keeping their operations and paying their employees. We all desire normal operations to resume as soon as possible. Aside from the programs available at the state and local levels, R&D tax credits also play a vital role.
Currently, we are struggling to live normally again. Many states are on shelter-in-place orders, and everybody is concerned for their safety. Businesses that remain open are doing split shifts. There are challenges with social distancing, and supply chains are not in order. In the end, cash is vital to fund manufacturing operations.
The Research and Development Tax Credit started in 1981, yet many companies still don’t understand it. Every year, small and eligible businesses fail to claim the benefits. Either they didn’t know they qualified or don’t understand how it works and how to be eligible.
If you’re here to understand R&D tax credits and how they work, then you’re in luck. We want to help you determine if this opportunity is perfect for your business.
How R&D tax credits work
Contrary to what many people think, the R&D tax credits aren’t only for medical devices, big technology, or drug companies. They also apply to manufacturers, regardless of their sizes.
Sadly, many manufacturers fail to realize how it works, so they miss out on this opportunity. As long as they make or improve products or processes, they have activities that can qualify for the R&D tax credit.
How do tax credits help companies?
Research and development tax credits can help lower the Federal and State tax liability. Companies also apply it to more than just the deals they win. Even if they only made changes to existing projects, they could still qualify for the credit. If they competed for a project but didn’t get it, they could still claim the credit.
What manufacturing activities are eligible for R&D tax credits?
Have you worked on a business proposal but didn’t get the project? Have you made any changes to existing products to make new materials? Or have you retooled any equipment to improve the product manufacturing process? If so, then you’re eligible for R&D tax credits.
Below are seven manufacturing activities that qualify for tax credits:
External and internal designs with a client may also qualify as research and development activities, which means they are eligible for tax credits. The design has three elements: form, fit, and function. The activities must cover all three to ensure eligibility.
- It refers to the size, shape, dimensions, weight, mass, and other structures that distinguish a product.
- The product should physically connect to another part. For example, a screw must fit within the specifications for the space around it to fit correctly.
- It refers to the action or actions that a product could perform – if it met the expectations.
Design meetings should start early in the sales cycle until the point of production. Tracking them and recording discussion topics will help you secure valuable R&D tax credits.
Usually, the costs that help develop engineering processes will require new equipment. If companies buy them to streamline the production of an existing line or manufacture a new product, they can qualify for the tax credit.
Here are five examples:
- Developing and improving ISO standards
- Evaluating new tools
- Improving tools and fixtures
- Software enhancements
- Improving testing prototypes
In the engineering process, another costly element would be buying new equipment. If you invest in new equipment annually, then this could be an opportunity to obtain tax credits.
Proof of concept
Proof of concept or POC steps can be complex, as they depend on the customer demands, cost considerations, and other factors. Luckily, most of them provide manufacturing companies an opportunity to reap valuable results. The time and effort your company spent during the fit-form-function phase can qualify for tax credits. And even though the client is paying you a fee to provide the service, you can still be eligible.
Designing new tools to create a product may also qualify for research and development tax credits. The design process may include:
- Design changes in improving cost, performance, or quality
- Production drawings
- Tooling layout
The tool building process may include:
- Quality check
- Time spent in building tools
- Wire EDM
Trial production run
The trial production run is necessary to ensure that the products meet the client’s specifications. This step allows for reviews and inspections. Do they meet the requirements set by the clients? Is the execution efficient?
One of the most helpful scoring during the trial production run phase is the first pass yield rate. The goal is a 100% first-pass yield, but that’s not always the case. This scoring measures how many parts during the production run don’t need reworking. The work you perform to adjust the production line, increasing the yield rate, can qualify for tax credits.
As a rule, any first manufacturing run that includes reviews and inspections to address potential issues would qualify for credits. And any repeat orders of existing products without revision or design changes wouldn’t.
People overlook the time, effort, and expenses manufacturing companies incur to gain and retain clients. However, creating new products or manufacturing processes for new clients will take research and development. These are also necessary to improve and modify them for existing customers. Thus, a thorough review helps in getting huge savings.
The packaging stage is an essential part of product development. It requires packing the final products to preserve them throughout the process, preventing any damage. So, how does this step qualify for research and development tax credits?
- Hire a packaging engineer in creating unique product custom packaging
- Look for new materials due to regulatory compliance changes or environmental concerns
- Follow through the process and optimize the packaging size
- Streamline the packaging process and reduce costs
- Create reusable boxes
Ultimately, the activities should improve the packaging for quality, cost, or reliability to obtain R&D tax credits.
Interesting related article: “What is Manufacturing?“