Trying Something New? Don’t Miss Out on the R&D Tax Credit
Many manufacturers are eligible, but only 1 in 20 claim the research and development tax credit. You may be surprised about what qualifies.
If you’re “taking a chance” or “trying something new” with a manufacturing process or product, don’t miss out on the research and development (R&D) tax credit. Many manufacturers are eligible, but only one in 20 claim it.
The R&D tax credit could offset income tax expenses related to innovations, such as:
- automating a paint line with robotics
- going from manual to automated spraying methods
- designing or redesigning an assembly line
- using a pump or dispense system in a different way
Contact your company’s tax department or tax analyst about projects that could qualify as research and development. You may be pleasantly surprised.
What qualifies for the R&D tax credit?
Look into the research and development (R&D) tax credit if an activity or project meets these four requirements:
- Improves function, performance, reliability and quality of product or process.
- Is technological in nature, relying on engineering, physical science, biological science, or computer science.
- Aims to eliminate uncertainty about product or process improvement, or appropriateness of a design.
- Experiments with or evaluates alternatives through trial and error, testing, and/or modeling.
Even if a project fails, it’s still likely research and development. The R&D tax credit could still offset income tax costs.
What expenses can be claimed?
Claimable expenses involve wages, supplies and contract research. Examples include:
- salary paid to employed engineers who designed the improvement
- hourly wages paid to linemen who built prototypes
- supplies used to model or test the innovation
- payments made to researchers hired on a contract basis
Who offers the tax credit?
The United States federal government started offering the research and development tax credit in 1981. The Protecting Americans from Tax Hikes (PATH) Act of 2015 made it a permanent part of the federal tax code.
Many states also offer a research and development tax credit. Companies in those states can claim both state and federal tax credits.
Knarr, Greg. How a Little-Known Tax Credit Can Pay Off Big in Automation Costs. IndustryWeek, alliantgroup, 20 July 2018
Holtzman, Yair. U.S. Research and Development Tax Credit. The CPA Journal, New York State Society of CPAs, 25 Oct. 2017
Echols, Mark. Why Manufacturing Companies Are Missing Out On Valuable R&D Credits, Tax Incentives Blog, Corporate Tax Incentives, 4 Apr. 2018
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