Plastics. Pharmaceuticals. Fuel Additives. Shampoos and Conditioners. All of these are made possible through technological advancements by the chemical industry. While scientists are busy mixing complex formulas to create new and innovative products, the equipment used to make those unique compounds are often overlooked. They are the unsung heroes that make these innovations possible.
Equipment manufacturers contributing to the chemical industry may not realize that the Research and Development (“R&D”) tax credit is available to inject additional capital back into their businesses. Many of these companies view their day-to-day activities as merely conduct in advance of the normal course of business, when in reality, the complex science and engineering required to produce reliable equipment often qualifies for R&D tax credits. There are a variety of factors that these companies constantly evaluate, including: the corrosive nature of the chemicals, the amount of pressure and correct temperatures necessary to create specific compounds, system flexibility to use a myriad of different chemicals, as well as the resulting chemical reaction. Additionally, the companies must also consider space constraints for where the equipment is located, the safety of the equipment operator, and methods for limiting chemical contamination when determining the appropriate design for the equipment. When viewed in this light, it’s clear that these manufacturers are undergoing as much R&D as those scientists who use the equipment.
alliantgroup has seen great success identifying R&D tax credits for taxpayers that produce custom mechanical systems for the chemical industry. In a recent single year credit study, alliantgroup successfully identified over $200,000 in R&D tax credits for a manufacturer that produced specialized equipment capable of processing toxic and corrosive chemicals. alliantgroup determined that the company had qualified expenditures in employee activities, supply costs, and contractor expenses, all of which contributed to ensuring that the customized equipment effectively processed these corrosive chemical mixtures and compounds, while also complying with industry regulations and safety standards.
So how would a company go about determining whether or not they qualify for the R&D credit? For businesses contributing to the chemical industry, the solution is simple; alliantgroup stands ready to help these companies identify qualified activities so that they may reap the benefits of the R&D credit. Now that certainly is a winning formula any business can get behind!
Contact us today to learn how your business can benefit from alliantgroup’s tax consulting services.
Many of us enjoy the tasty, chocolate covered cupcakes and cookies found on the shelves of their local grocery store. However, most of the manufacturers that actually engineer, design, and fabricate the food processing equipment to make these wonderful chocolate treats have no idea that R&D tax credits for the labor, contractor expenses, and supplies consumed during development may be claimed. alliantgroup recently worked with one of these small, food processing equipment manufacturers and identified over $800,000 in federal and state R&D tax credits!
To put these credits in a real world context, let’s look at cocoa. Cocoa beans that are harvested in South America must go through significant processing before appearing on grocery store shelves. During the design of the equipment, engineers must account for the characteristics of the food to be processed. For example, when cocoa beans are harvested in South America and transported to the final destination, vibrations generated during transport often cause the cocoa beans to become very compacted and brick like.
It is food processing equipment manufacturers who are tasked with developing machinery that will fluidize and separate the solids from the cocoa in preparation to become tasty chocolate treats. Also, due to the relatively high fat content of cocoa, equipment designers have to account for processing speeds and the resulting temperatures. If the cocoa is processed too rapidly, the oil may separate from the beans resulting in potentially clogged processing equipment due to the separated and oily mixture.
Not unlike this cocoa example, many times, the development of food processing equipment results in uncertainty regarding the ultimate design, the appropriate configuration, and ideal equipment to be integrated within the overall food processing system. To overcome these challenges, designers may utilize computer modeling software to run engineering calculations and to analyze alternate dimensions to ensure that the system will operate as desired.
Given all of this customized design and development work, tax paying food processing equipment manufacturers may incur additional expenses associated with the development of the equipment. This development process mirrors and reflects the exact legislative intent behind the R&D tax credits. These credits were specifically enacted to incentivize and reward U.S. based R&D activities. The result is not only tasty, chocolate treats lining our pantries and grocery store shelves, but also a financial flexibility that permits small food processing equipment manufacturers to reinvest in future R&D activities.
If you would like to learn more about how your company may be eligible for the R&D tax credit and other valuable tax incentives, please contact alliantgroup today at 800.564.4540 or firstname.lastname@example.org.
While often overlooked, manufacturing companies perform a multitude of activities that can qualify for the Research and Development (“R&D”) tax credit.
Manufacturers that are improving their processes or designing and developing new or improved products are precisely the companies that can be eligible for this incentive. A segment of the manufacturing industry that may also qualify for the R&D tax credit is food manufacturing — specifically, those companies that process food for consumption. Food manufacturers are not only developing improved processes, but they are also working to ensure that their processes are as safe and efficient as possible. It is these development activities that make food manufacturers candidates to claim the R&D tax credit.
Food manufacturers regularly improve and update machinery and equipment to ensure not only the safety of the food during processing, but to maximize the safety of food delivered to the consumer. The integration of new equipment into the manufacturing process can be qualified toward the tax credit. In addition, food manufacturers improve processing techniques that increase product consistency and maintain compliance with ever-changing federal and state regulations.
alliantgroup recently worked with a food manufacturer to identify activities that qualify toward the R&D tax credit. This company focuses on the manufacturing of meat products for sale to restaurants throughout the country. The company expended resources, including employee time, every year to ensure that their manufacturing process complied with all regulations while maximizing manufacturing efficiency. Recently, a new process was implemented at the company that improved the quality of the meat, both during and after the freezing process. This ensured that the product delivered to the restaurant was as fresh as possible. This company’s qualified activities for the R&D tax credit focused on the consistent development of improved manufacturing process.
It is easy to see how pharmaceutical companies qualify for the research and development (“R&D”) Tax Credit: state-of-the-art labs and equipment, chemistry, and scientists in white lab coats! However, there are many qualified activities and expenses that are often overlooked without a comprehensive understanding of the types of qualified activities and expenses outlined in Section § 41.
In addition to developing novel pharmaceutical drugs, companies must determine how to take a drug formula from small-scale development in the lab and scale it up for large-scale production and distribution. Therefore, it’s not just the activities of pharmacists, chemists, and laboratory technicians that can be captured towards the R&D Tax Credit. Many of the employees that work on the production line are often participating in qualified R&D activities as well. Further, not only is employee time working on initial production runs to refine the manufacturing process a qualified expense, but the raw materials used during first-runs are also qualified.
alliantgroup recently worked with a growing pharmaceutical company to identify R&D Tax Credits. This particular company specializes in developing generic drugs and is currently making efforts to expand its product line. Even after the final drug formulations are determined for each new product, a significant time investment remains to develop and optimize the manufacturing processes.
Additionally, the company expended significant resources to improve the regular manufacturing processes that were already in place to increase overall efficiency. Many of these costs constituted qualified research expenditures. For example, the company hired consultants to design the optimal production floor layouts to maximize production.
Ultimately, alliantgroup identified nearly one million dollars in R&D Tax Credits for this client. A significant portion of the credit was based on new and improved manufacturing processes demonstrating that qualified R&D expenses extend beyond the confines of a laboratory setting.
There are many companies today that are missing out on an important tax saving opportunity, research and development (“R&D”) tax credits. One industry that is often overlooked is tool and die manufacturers. Only a small fraction of these companies are claiming the R&D credit, although the majority qualify for this valuable resource. The R&D credit is not just for scientists in lab coats, but for any industry driving innovation in the US. Tool and die manufacturers are a prime example of this type of innovation. These machine and job shops not only develop new molds, fixtures, punches, dies, and jigs utilizing the latest in technology, but also develop the most efficient processes to streamline the manufacturing of these items. It is precisely these activities that make tool and die manufacturers prime candidates for the R&D tax credit.
Recently, alliantgroup helped a small tool and die company to realize tax savings of over $365,000. This was a small company with a staff of close to 30 employees that specialized in automotive tooling. This company was referred to alliantgroup by their CPA and, like many other manufacturers, was not sure whether they qualified for the R&D credit. alliantgroup walked this company step by step through the qualification process and discovered several areas of the company’s expenditures that were able to be taken towards this credit through a thorough examinations of this company’s finances and activities. This example is only one of the many success stories in the tool and die industry.
They say the grass is always greener on the other side. For lawn care equipment manufacturers who have yet to claim the R&D tax credit, that old saying could not be truer. Many small to mid-size equipment manufacturers – including developers and producers of commercial and residential lawn care equipment like mowers, aerators, sprayers, and seeders – don’t realize their efforts qualify them for a generous tax credit. However, the design and development of such equipment, as well as improvements to existing models and machinery, entitles such companies to the R&D tax credit.
Like many other manufacturers, the makers of small equipment face uncertainty in determining the appropriate material, part design, and assembly of products marketed for sale. In the case of lawn care manufacturers, the unique function of such equipment – combining horticultural functions with traditional motorized components – creates further need and opportunity for research and development. Considerations particular to such manufactured equipment include blade configuration and function for mowers, fertilizer capacity and dispensing capability of sprayers and aerators, fuel economy, and mobility within constrained landscaped spaces. For example, a lawn care manufacturer seeking to increase the capacity of a commercial sprayer must not only evaluate its design to ensure the part’s chassis and structure can support the additional weight, but that the part’s motoring capabilities can power the heavier equipment. Throughout this process, the company need also keep in mind the ability of the equipment to move in and around lawn environments and ensure distribution of the fertilizer material.
The design and manufacture of lawn care equipment is ripe for qualification for the R&D tax credit, thanks in large part to the unique development considerations necessitated by pairing motor functions with lawn care and maintenance like cutting, spraying, and spreading. For companies claiming the credit, keeping lawns green can also keep some green in the pockets of lawn care and small equipment manufacturing firms.
Check back often for more manufacturing related blogs from alliantgroup.
Research activities related to developing manufacturing processes, as well as the tooling utilized to enable manufacturing of products, can be eligible for R&D tax incentives.
Many U.S. companies feel that they do not qualify for R&D tax incentives simply because the activities they are performing fall under normal, everyday, engineering activities. These companies feel they are not developing anything unique and they are simply developing manufacturing processes utilizing proven technologies such as stamping or plastic injection molding.
Despite the use of proven technologies, both die stamping and plastic injection molding require the use of highly complex dies and molds to enable specialized manufacturing of products with extremely precise specifications. For example, many parts attach to other parts and will not function if hole locations do not line up precisely as required. These precise specifications can be difficult to achieve due to shrinkage or bending of materials during manufacturing.
To ensure satisfaction of precise tolerances, designers utilize sophisticated software to design and model dies and molds prior to initiating tooling production. For example, tooling designers simulate various mold flow conditions such as temperatures and pressures to ensure that the tooling will produce parts that satisfy stringent requirements and tolerances. In addition, tooling designers frequently evaluate the possibility of producing multiple parts at one time utilizing multiple impression molds. Producing multiple parts in one shot often leads to increased efficiency in the manufacturing process. For stamping operations, tooling designers frequently simulate stamping processes to predict defects such as material thinning, splits, spring back, or wrinkles. Tooling designers then utilize the results of these simulations to improve tooling designs prior to building tools or producing first article parts.
These simulations are precisely the type of digital prototyping envisioned by the authors of the R&D credit and satisfy the process of experimentation requirement stipulated by the Internal Revenue Code and associated regulations. Once the tooling design process is complete, manufacturers then produce tooling that is later utilized for the production of first article parts. Manufacturers often produce several first article parts before perfecting the manufacturing process. In addition to the modeling activities, all of the activities undertaken to perfect the manufacturing process are also elements of a process of experimentation. In fact, development is not complete until the process produces parts that satisfy all requirements.
For many manufacturers that do not own their tooling, this is critical. Since development is not complete until producing parts that satisfy stringent functionality and quality requirements, the costs associated with modeling and trials can be eligible for R&D tax credit treatment. In 2009, the U.S. Tax Court issued a new ruling related to supply costs for customer owned tooling. Qualified supplies are not eligible for R&D tax credit treatment if they are depreciable in nature. Prior to this ruling, the costs for tooling utilized in process development were generally not included in R&D tax credit claims. This ruling clarified that the relevant inquiry is whether the supply costs are depreciable in nature in the hands of the taxpayer. Where customers own the tooling, the taxpayers cannot depreciate costs of the tooling because they do not own the asset. In this case, the costs of these molds – often tens of thousands of dollars – can be captured towards the R&D tax credit.
alliantgroup has been very successful in identifying R&D tax credits for taxpayers that utilize tooling in process development. For example, alliantgroup was able to identify over $400,000 in R&D tax credits for a die stamping company with average annual revenues of approximately $50 million. This R&D tax credit included over $5 million in supply costs related to the development of stamping processes utilizing progressive dies.
This is just one example of how supply costs can generate significant tax savings for companies utilizing the R&D credit. By taking advantage of these credits, business can generate significant cost savings internally and help strengthen the economy as a whole by generating more advanced jobs.
Originally posted Mar 28, 2013 in Forbes.com.
The research and development (R&D) tax credit has never been more available to manufacturers. It’s a shame the majority of them don’t realize it yet.
At nearly $10 billion a year, the R&D tax credit is one of the biggest incentives available and can save manufacturing companies hundreds of thousands of dollars — yet only one out of twenty small- and medium-sized companies eligible for this credit takes advantage of it. Why, you ask? There are a number of self-censoring myths preventing developers from securing the credit. Taking advantage of these incentives for many companies can be the easiest way to get funding quickly. Avoid allowing your business to fall victim to the following myths:
One. The Research and Development (R&D) tax credit is only for companies that are inventing something brand new.
Nonsense. The R&D tax credit is not just for inventing something or getting a patent. It is also available (and most typically used by) companies that are improving or modifying an existing product or improving a manufacturing process — that is, making a product cleaner, quicker, greener or cheaper. As such, manufacturers are good candidates for the R&D tax credit.
Two. The R&D tax credit is only for companies with laboratories and test tubes.
Wrong. While companies involved in basic research are obviously prime candidates for the R&D tax credit, the credit is very much about encouraging applied science — solving a customer’s problem or a production issue using known scientific principles. For example, a manufacturer received $265,000 in federal and $16,000 in state credits for their work in improving their die casting, metal stamping and precision tools development processes — returns accrued by simply improving on the work the company did on a daily basis.
Three. The R&D tax credit isn’t for companies in my industry.
Think again. Thousands of manufacturers can secure the R&D credit for any number of eligible activities, including iron casting, sheet metal plating, hot stamping, injection molding, plastics, modeling and more. Self-censoring is the biggest roadblock to companies taking the R&D tax credit — you don’t need to put a person on the moon or work in a lab to be eligible for the credit.
Four. The R&D tax credit is only for the big companies.
That is exactly what too many small and medium businesses think. While the big guys, with their armies of tax lawyers, are all over the R&D tax credit, too often small and medium companies act as if there were a velvet rope barring them from taking the R&D tax credit. According to the Small Business Administration Office of Advocacy, 60 to 80 percent of all new American jobs come from small- to medium-sized businesses. Given their role in expanding the American economy, isn’t it high time that small and middle market companies take advantage of the same perks offered to large corporations?
The R&D tax credit is available for small and medium businesses, but you do need to show up and apply to get it — the IRS isn’t simply handing out credits.
Five. The R&D tax credit won’t help me with my state taxes.
Au contraire. Thirty-eight states have a state R&D tax credit — and several states are looking this year to expanding their R&D tax credit or creating one. We have worked with companies that have been able to use their state R&D tax credit to eliminate or significantly reduce their state income taxes. For instance, a manufacturer specializing in high injection molded components was awarded not only $154,000 in federal credits, but also received an additional $178,000 in state credits for their work.
In most situations, if your company is eligible for the federal R&D tax credit, it will also be able to benefit from the state R&D tax credit.
Six. The R&D tax credit won’t help my bottom line.
Incorrect. The R&D tax credit was created with the manufacturing industry in mind to find federal and state tax savings from the tens of thousands of dollars, to well over a million dollars for these businesses. For instance, a steel ring manufacturer received $406,000 in federal credits for design improvements in their product while a molded plastics company received $116,000 in federal and $91,000 in state credits. Much black ink (and green dollars) has been realized for companies thanks to the R&D tax credit.
Seven. It’s all too good to be true — it must be snake oil.
The R&D tax credit benefits thousands of companies a year. The credit has been part of the Internal Revenue Code since 1981. While the IRS isn’t giving away this tax credit — you need to have proper documentation of your activities and correctly apply the law — it is certainly a credit that is widely recognized and utilized by a wide range and number of businesses every year.
Eight. We are going to have tax reform and the R&D tax credit is going to go away.
The R&D tax credit is a close third to motherhood and apple pie when it comes to support in Washington, D.C., and the credit is supported on a bipartisan basis in both houses and by the Obama Administration (and by every previous administration since it was first put in place in 1981). All indications are it will stay in place even with tax reform. In fact, a string of court cases have expanded the application of the R&D credit in recent years, further increasing its reach in the manufacturing industry. Of particular interest to manufacturers, the court ruling in TG Missouri Corp. v. Commissioner provided that molds and prototypes used for production, if not depreciable by the taxpayer, are eligible for the R&D credit, in turn making it easier for manufacturers to look at certain supply costs as qualifying for the credit. Recently proposed legislation seeks to expand TG Missouri even further by allowing businesses to classify a prototype or pilot model as R&D expenses, regardless of the ultimate use of the item.
The R&D credit has never been more available to manufacturers. In many cases your business may be eligible to file an amended return and claim the credit for the previous three years — meaning more money in your pocket to grow your business and create new jobs.
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Originally posted Jun 10, 2013
The manufacturing industry remains in a constant race to improve their products, as well as the process of making their products — all while dealing with tight budgets and low profit margins. These twin efforts push innovation to the forefront, in particular, applying innovation to the task at hand via research and development (R&D). Happily, the tax code rewards manufacturers who are engaged in these efforts to stay competitive with the R&D tax credit. Unhappily, far too many manufacturing companies, especially the small- and medium-sized, are failing to take advantage of the R&D tax credit.
The benefits of the R&D tax credit can be significant for the bottom line. For example, alliantgroup recently helped a specialty sheet metal company with annual revenue of $4 million receive over $70,000 in federal R&D tax credits and $91,000 in state credits for the testing and implementation of a new metal stamping process. Another manufacturer of precision tools with annual sales of $12.7 million acquired $281,000 in combined state and federal R&D credits for their efforts toward the testing and improvement of new modeling procedures.
The R&D tax credit is a lucrative government-endorsed incentive that many manufacturers are failing to utilize, either from lack of information or self-censorship (assuming their activities wouldn’t qualify). If your firm is in any way developing new or improved features or functionality through a development process, you should be taking advantage of the major tax benefits offered through this credit.
Isn’t R&D reserved for people in white lab coats?
No! You don’t have to be creating groundbreaking inventions and processes to be conducting qualified activities as defined by the Internal Revenue Code.
Throughout the years, Congress has reduced documentation and qualification requirements to make this credit more accessible to companies outside of the Fortune 1000. Eligibility has been boosted and much needed clarification of credit qualifications has been provided. Small- to medium-sized firms now have a clear, consistent and affirmative message toward estimation and costs that can be claimed.
Examples of qualifying activities for this credit include developing improved products or unique computer numerical control programs, designing innovative manufacturing equipment and developing or designing tooling and fixture equipment. A key benefit of the federal R&D credit is that a business can claim the benefit for all open tax years — generally the last three years plus the current year — and the credit may be carried forward up to 20 years, often resulting in hundreds of thousands of dollars added to a business’ bottom line. In addition, many states now have a state R&D tax credit — increasing the tax savings for manufacturers.
The key is to throw out the old definition of R&D, which many believe is limited to developing products that are new to the industry as a whole. A new host of activities that many businesses might view as operating expenses are potentially eligible for qualification under the R&D credit. The research and design doesn’t have to be new to the world, just new to the company.
Self-censoring slows American innovation and job growth
While this incentive is rewarding and attainable, many manufacturers fail to take advantage of it. The Wall Street Journal reported that 19 out of 20 small and medium businesses that are eligible for tax incentives, such as the R&D tax credit, are not claiming the benefits to which, upon examination, they would find that they are fully entitled to.
This is overwhelmingly due to self-censorship. Small- and medium-sized business owners frequently think that only Nobel Prize winners and rocket scientists should bother applying. At $10 billion credits awarded a year, even if you did not think you qualified in the past, it is certainly worth a second look.
“The R&D tax credit is arguably one of the most important incentives our government has created to help support American businesses. Small- and medium-sized businesses account for 70 percent of jobs within the United States, and it’s imperative that they take advantage of the support being offered by our government,” said Mark W. Everson, former IRS commissioner and current alliantgroup vice chairman.
In the last 60 years, innovation in new products or new processes has been a central driving force to the nation’s economic growth, thus qualifying countless American businesses for these beneficial incentives. This effort needs to continue in order to keep up with a constantly changing market and stay relevant within the manufacturing industry.
Claim this credit now!
Congress and many state governments realize how critical innovation is to the future of America’s competitiveness in the world, and the R&D tax credit is an important incentive to nurture that innovation. They also know that the companies engaging in these activities are supporting millions of high-skilled, well-paying jobs.
For these and other reasons, the R&D credit doesn’t look as if it will be going anywhere anytime soon. Any manufacturer with relevant products or services would be smart to realize the benefits of this credit and take a strategic approach to allocate that to which they are fully entitled.
While this incentive can be of extreme benefit to manufacturers, it is also complex, and fully identifying the proper substantiation for capturing the credit requires a deep understanding of the tax code. For this reason, companies interested in pursuing this tax credit would be well served by securing the services of a third-party specialty tax firm with practical experience in the disciplines of manufacturing engineering, industrial engineering, mechanical contracting, tool and die, and metallurgy, to work alongside and offer support to their CPAs, ensuring optimal results. By leveraging this expertize companies may be able to realize R&D tax credits that benefit their bottom line while also helping promote its overall strength and viability in the marketplace.
alliantgroup is the nation’s premier provider of specialty tax services. As such, they have one mission: to help CPA firms and the businesses they advise take full advantage of the many available federal and state tax credits, incentives, exemptions, and deductions — infusing cash to help their businesses compete successfully and grow. Learn more at www.alliantgroup.com.
Reprinted from: http://www.manufacturing.net