Are You Eligible for the Research & Development Tax Credit?
by Brian D. Kitchen, Manager, Tax Strategies, Kreischer Miller
When you think of research and development activities, the image of scientists working in a laboratory often comes to mind. In reality, the R&D credit is available to many mid-sized companies. While it was in fact originally geared toward the science and technology fields, the R&D credit has evolved to benefit other industries where these qualifying activities take place. Companies that devote significant time and resources to improving product design and processes as well as new product development can benefit from this credit.
Did you know that your manufacturing company may be eligible for a dollar-for-dollar tax credit for monies spent on research and development? Concerned that declining research spending could adversely affect U.S. economic growth, productivity gains, and competiveness within global markets, Congress first introduced the Research & Development Tax Credit in 2000 to encourage investment within the U.S.
The R&D credit became a permanent credit in 2016 and is now available to more companies. Previously unavailable for companies with Alternative Minimum Tax (AMT), new legislation allows companies with $50 million or less in gross receipts to apply the R&D credit against both regular tax and AMT.
- You have developed products or processes that are or will be patented. Alternatively, you are also eligible if you have developed specific know-how that you treat as a trade secret.
- You have developed a new or improved product that advances the state-of-the-art and that required one or more redesigns, simulations, mock-ups, and/or experimental trials to achieve.
- There have been process improvements in your company’s operations that have involved the development, integration, or prototyping of new or innovative technology.
- You have developed or incorporated a new technology in order to catch up to a competitor.
- There was a product or process improvement that your company attempted to develop but eventually abandoned. Note that the project did not have to be successful in order to be eligible.
- You are or have been involved in an Industrial Research Assistance Program (IRAP).
- In order to carry out projects such as those listed above, you incurred costs in any of the following categories:
- New equipment (developed or purchased)
- Prototypes that were discarded or scrapped
- Material that was consumed during experiments or tests
- Test parts (e.g. molded pieces) that were made in order to refine a process
- Consultants or subcontractors
- Unexpected overruns while trying to satisfy a client’s requirements
- Contracted test labels (e.g. UL, NEMA, FCC)
Qualifying activities for the R&D credit are broader than most people expect, and should be discussed during annual tax planning. Companies that take advantage of this and any other tax credits that are available to them can significantly lower their effective tax rates each year. This in turn helps them compete more effectively in the global economy and reinvest more funds in the company for future infrastructure and capital asset purchases.
Brian D. Kitchen is a Manager in Kreischer Miller’s Tax Strategies group. Kreischer Miller is a leading independent accounting, tax, and advisory firm serving the Greater Philadelphia and Lehigh Valley areas. With a significant portion of our revenue derived from clients in the manufacturing industry, Kreischer Miller is one of the leading accounting firms serving manufacturers in the region. Our experience with a diverse range of organizations – from smaller, local manufacturers to large, Fortune 500 companies with national and international operations – gives us the background and depth to understand the challenges and opportunities that face the industry.