It's January, and now is a good time to begin documenting your R&D activities for 2016. You may recall that the R&D Tax Credit was recently made permanent—one of the better "gifts" a bi-partisan Congress has given manufacturing, as I recently wrote. In a recent webinar sponsored by SPI: The Plastics Industry Trade Association (Washington, DC) and Black Line Group (Plymouth, MN), a company specializing in R&D tax credit services for small to mid-sized manufacturing companies, Black Line's Scott Schmidt noted the difference between a "tax credit" and a "tax deduction."
A tax credit is a "dollar-for-dollar" reduction in your tax bill. This means that it's "cash to the bottom line of your company," said Schmidt. "If you've not claimed an R&D credit in the past, you can go back and claim past years (be sure you have the necessary documentation) and into the future. It's the gift that keeps on giving."
If you think R&D is only done in a laboratory by scientists, think again. You don't need to have a formal R&D department to qualify for R&D tax credits. Schmidt outlined a number of activities that manufacturers—processors and moldmakers—perform that qualify. For example, if you are improving a product or process, that qualifies. You don't have to be inventing a new product or component—improvements on current components or processes count. "There's a lot of R&D going on in contract manufacturing and job shops," Schmidt reminded the webinar attendees. "In reality, most of you are developing manufacturing processes."
Other examples include prototyping to prove out a new design, jigs and fixtures, testing and certifying (a mold for example). You can even get credit for implementing new technology when you add new equipment. "You can't get credit for the cost of the equipment, but by installing new technology, it implies that time was spent investigating machinery, and getting it up and running," Schmidt said.
Moldmakers, for example, can get the tax credit for time spent working on a request for quote that requires time figuring out how a component will be designed for manufacturability, whether or not they get the job. "If owners get involved with these types of activities, they can qualify their time," Schmidt explained.
The R&D tax credit incentivizes companies to invest back into their businesses so that they can compete better on a global basis, Schmidt noted. "Conceptually, anybody making something is doing R&D," he added.
Over the past 35 years that the R&D tax credit has been in existence, mostly large corporations have taken advantage of the program. During roughly the last eight years, however, information about the program has started to flow down to smaller companies. "A lot of them still don't take advantage," Schmidt said. "Now that it's been made permanent, even more companies will benefit from the program."
Schmidt gave a cautionary note, however, that the R&D tax credit is "a very subjective area of the tax code." That means that the most important factor in being able to get the tax credit is documenting your activities.
Additionally, make sure that your CPA or third party that is helping you has extensive knowledge of the R&D tax credit program and how to properly get the credits. "You need to get help from someone who works with the R&D tax credit a lot to realize maximum benefit," said Schmidt, "not from someone who dabbles in it once or twice a year. Plus, starting in 2016, eligible small businesses and shareholders of S corporations may claim the credit against the Alternative Minimum Tax, if they have average sales of less than $50 million over the prior three tax years. This is huge!"
So, remember this "gift" and start documenting your R&D activities. If you're not sure what those might be, get some expert assistance. Hey, we all need a break!
