The good news is that the Research & Development tax credits survived the wrangling in Congress over the fiscal cliff. The bad news is that many moldmakers won’t take advantage of this incentive that can provide some much-needed relief from their tax bite.
According to Scott Schmidt of the Black Line Group, a business consulting firm based in Plymouth, MN, the R&D tax credits were part of the American Taxpayer Relief Act of 2012. This extended the Research & Development incentive retroactively back to January 1, 2012 through December 31, 2013.
“This is great news that can enhance the bottom line for all manner of manufacturing and technology-related companies because the tax credit is a dollar-for-dollar reduction of a company’s or shareholder’s tax liability,” says Schmidt, who works with many plastics industry companies, and is an Affinity Partner for the Society of the Plastics Industry (SPI).
While the R&D tax credits are beneficial to manufacturing businesses, moldmakers don’t take full advantage of this opportunity to reduce their tax liability because many don’t understand the program. “One of the biggest road blocks that we hear when dealing with many of these companies is the belief that they don’t do R&D,” Schmidt tells PlasticsToday. “R&D doesn’t just take place in a lab by a scientist in a white lab coat. The R&D tax credits apply to any company that makes, improves or develops products and/or processes.”
The products a company makes can be for companies that are making other products, which describes perfectly what mold makers generally do, or your own products. Often R&D activities are more obvious for those companies that make their own products, and less obvious to mold makers who are designing and building molds per customer specification. That is why many mold makers fail to take advantage of the R&D tax credit: Most see themselves as a business that simply takes a print and makes what the customer wants. However, these mold makers are likely performing R&D but have not learned to recognize that fact or identify the qualifying activities.
Mold manufacturers know that there is much more involved than taking a print and cutting steel to match the print. It often requires developing a different way to mold a part which means creating new mechanisms for the mold in order to get the part required. It requires various iterations of design, testing of various design ideas, and collaboration with other companies, suppliers of various mold components who perhaps do their own R&D to devise a method to enable the moldmaker’s mold design to work properly.
“In reality,” says Schmidt, “a large percentage of the time moldmakers are doing R&D, but because they don’t understand how broad the definition is, they may be under the impression they don’t do any R&D.”
The four-part test
There is a four-part test that moldmakers and processors can use to gauge whether or not certain activities will qualify for the R&D tax credit. Rachel Bishop, CPA and director of R&D tax credits for Black Line Group, explains these to PlasticsToday:
- Permitted Purpose – You have to be intending to create or improve a product or process. “Some things are not as obvious such as developing automation to reduce costs throughout their manufacturing facility, enhance functionality, or improve quality,” says Bishop. “This test is pretty easy to meet. Much of what mold manufacturers are doing surrounds the creation or improvement of a product, often the component or the mold, or the manufacturing process to create those products.”
- Technical Uncertainty – “You either have to not know you can do it, which is the capability uncertainty, or not know how you will do it, which is a methodology uncertainty,” Bishop explains. “You will meet the Technical Uncertainty requirements if you know you can do it but don’t know how to get there. You may not know the exact design that will work best, how the molding process will function, or if the mold is optimized to the molding process required.”
- Process of Experimentation – This requirement involves evaluating different alternatives to resolve the uncertainties. “They need to try to find out how they’ll develop a mold that will achieve the customer’s needs such as by prototyping a part using various processes such as additive manufacturing, making a pilot mold, performing testing, and modeling and simulation such as using mold-filling software to see if a certain way of designing a mold will work under actual processing conditions,” Bishop says.
- Technological in Nature – The activity must rely on principles of one of the following sciences: Engineering, Physical Sciences, Computer Sciences or Biological Sciences.
Bishop notes that there are some other nuances within these tests to consider, but generally if projects meet this four-part test, they will likely qualify. “You can include the following expenses in the development phase: wages, costs of the supplies you’re consuming, and potentially third-party contractor expenses incurred during the development phase of the project,” Bishop says.
Record keeping is important, but while there are “no strict requirements there is certainly a basic requirement or standard amount of documentation that should be kept,” says Bishop. Black Line Group develops best practices for its clients with regard to tracking qualifying activities and record-keeping.
With tax filing time right upon us, should mold manufacturers be thinking about the R&D credit? “They absolutely should be thinking about it,” Schmidt says. “Many companies have great CPAs who just don’t have the capacity to understand and become expert with the complex R&D tax credit program. We partner with these firms to provide the expertise they cannot.”
Schmidt also notes that there have been some changes in the way calculations are done, and while these don’t make a huge impact on the R&D tax credits he advises CPAs to check out these changes so the calculations are done correctly.
Black Line Group advises companies to get assistance from someone who knows this part of the law. Schmidt adds, “The key to maximizing the credit is not the number crunching on the R&D tax credit form—it’s the input onto the form that has to be correct. You have to understand how to calculate it, but it’s not just about the calculation. It’s about being able to identify all the qualifying activities and expenses to get you to the point where your CPA can crunch the numbers.”