issue: June 2007 APPLIANCE Magazine
The Open Door
Get Paid for R&D
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by Craig Alspaugh, professional partnership program manager, Titan Manufacturing Solutions
Are you a U.S.-based company constantly looking for innovative ways to manufacture your appliances? Many companies don’t realize they qualify for the Federal Research & Development Tax Credit based on these innovations. Recent changes to the U.S. tax code allow manufacturers to qualify for R&D credits that previously did not qualify.
If your company has invested in streamlining processes, developing products, or innovating as a means to drive down production costs, you may be eligible for substantial tax credits under current regulations. In general, if your company is involved in U.S.-based design or production activities, chances are you qualify for the credit under these new regulations. The R&D Tax Credit is designed to help companies recapture a percentage of those dollars spent on innovation in an attempt to stay competitive in the global marketplace.
In 1981, the R&D Tax Credit was put in place to provide incentives for investing in research and development. However, barriers existed for small- to medium-sized companies, including daunting documentation requirements and limits on qualified activities. These initial regulations led to the perception that unless a company employed scientists in lab coats to develop patents, it did not qualify for the credit.
In late 2003, however, the IRS finalized new regulations to recognize innovation that occurs not only in the laboratory, but also in the offices of engineers and on the production floors of American manufacturing companies. As a result, the definition of qualified research expanded to include manufacturing activities that develop new or improved business components that could include the following areas:
- Products—Any new product lines; any improved product lines or models; any at-risk alterations to past product lines.
- Process—Anything that drives down costs to manufacture or increases competitiveness; innovation by automation, increasing production versus labor costs, production versus material costs.
- Computer Software—The labor and implementation costs in developing custom, internal-use software; custom modifications to off-the-shelf software.
- Techniques—Increasing efficiencies through lean concepts of application, Six Sigma, cellular manufacturing; waste-reduction initiatives; quality initiatives that improve tolerance, extend shelf life, etc.
- Formulas—Development of a new or improved chemical or compound; attempted use of alternative materials, including all process and technique adjustments relating to their use.
- Inventions—Any patent-worthy or patentpending products or processes.
These examples of qualifying activities need not be "successful" in the marketplace to qualify. The only requirement is that your company has taken on the risk and associated expense in its attempts.
To capture the credit, companies must identify potentially qualified activities and then allocate expenditures associated with those activities in accordance with the regulations. Due to uncertainty surrounding what qualifies as R&D, many companies utilize an outside engineering firm to evaluate their operations and make these determinations. Whether a company completes its R&D credit study internally or through an outsourced engineering firm, the IRS requires that the information be documented to provide details and calculations in conformance with IRS guidance.
Recently, U.S. President Bush signed into law HR 6111, a bill passed by the 109th Congress that included language extending and strengthening the R&D Tax Credit. Specifically, the traditional credit was extended retroactively from Jan. 1, 2006, through Dec. 31, 2007, and a new credit formula, called the Alternative Simplified Credit (ASC), is effective from Jan. 1, 2007, through Dec. 31, 2007. The R&D Tax Credit is still set to expire at the end of this year. This lapse will be 13th time in the 25-year history of the credit.
With a successful R&D study, you can reclaim these credits and realize significant and immediate cash refunds. This evaluation can result in a pleasant surprise—a $10 million to $20 million company may realize cash refunds in excess of $100,000. Because today’s R&D Tax Credit can provide significant cash incentives, why wouldn’t you investigate this lucrative tax benefit?
About the Author
Craig Alspaugh is professional partnership program manager at Titan Manufacturing Solutions, an engineering consulting firm that develops the justification for the R&D Tax Credit. To contact Alspaugh, e-mail firstname.lastname@example.org.