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.