Manufacturers must overcome many challenges to remain competitive in an increasingly global market.
From understanding and implementing sophisticated automated technologies to finding skilled workers to accurately managing inventory and tackling supply chain disruptions, manufacturing companies must embrace innovative solutions, strategic approaches and financial tools to overcome these challenges, maintain cash flow and increase profits. One such tool that many in the manufacturing industry may overlook is the Research and Development (R&D) Tax Credit. Based on the name of the credit, some in the manufacturing industry might mistakenly believe that it is not a viable option for their business. However, this powerful incentive has been successfully deployed by some of the largest manufacturing companies in the U.S. and across Pennsylvania.
What is the R&D Tax Credit?
The federal R&D tax credit, also known as the Research and Experimentation (R&E) tax credit, was first introduced in 1981 as a two-year incentive to encourage U.S. companies to increase their investment in R&D. Although initially intended as a temporary measure, the credit was repeatedly extended with bipartisan support until it was made permanent in 2015 with the passing of the Protecting Americans from Tax Hikes Act. Historically, the R&D Tax Credit could not reduce a corporation’s tax liability below the alternative minimum tax (AMT), limiting its use for many manufacturing companies. However, the 2017 Tax Cuts and Jobs Act raised the AMT exemption, enabling these businesses to avoid the AMT and fully utilize the R&D Tax Credit to offset their regular income tax liability.
How Does it Apply to Manufacturing Companies?
Given the dynamic nature of the manufacturing industry, innovation is essential for businesses to compete and succeed. Many standard industry initiatives may qualify for the R&D Tax Credit, including the following examples:
- Design and Development of a New Product – Development of a new product, including conceptual design, material selection, prototype development and testing.
- Design and Development of an Improved Product – Improving an existing product, for instance, by incorporating a new type of material that reduces weight and improves efficiency and performance while maintaining safety standards.
- Design and Development of a New Manufacturing Process – Design, development, and testing of new processing and handling techniques for a newly designed product to ensure that quality, safety and efficiency standards are met while reducing the number of manufacturing steps.
- Design and Development of an Improved Manufacturing Process – Implementing a new automated assembly line that uses robotic arms to increase production speed and precision, resulting in higher efficiency and quality.
- Development of New or Improved Processes to Meet New Government Requirements or Achieve ISO Certifications – For example, development of a new waste management process to comply with stricter environmental regulations including, but not limited to, advanced filtration systems to reduce emissions and achieve ISO 14001 certifications.
- Designing, Prototyping, and Developing New Technology and/or Manufacturing Equipment – Creating a prototype for a new three-dimensional printing machine that can produce complex parts with high precision resulting in early detection of design problems, functionality testing and increased production efficiency.
- Programming and Integration of PLCs (Programmable Logic Controllers) – Integrating PLCs into an assembly line to improve production speeds, reduce production errors and allow for real-time monitoring and adjustments.
- Design and Development of New or Improved Software Applications – Developing a custom software application for inventory management that integrates with existing enterprise resource planning systems to automate order processing and enhance operational efficiency.
These examples illustrate the diverse range of activities within the manufacturing industry that may qualify for the R&D Tax Credit. Expenses related to employee time, supplies or third-party contractors necessary to conduct research and development may be eligible R&D expenditures. As manufacturers expand, grow and innovate, claiming R&D tax credits is an important way to ensure that companies have the dollars they need to invest in a successful tomorrow. If your company is conducting activities similar to the examples listed, contact a member of the Schneider Downs Credits and Incentives Team to discuss how the R&D Tax Credit can potentially reduce your company’s tax liability.
About Schneider Downs Manufacturing Services
The Schneider Downs Manufacturing industry group provides specialized financial advice and services to our clients in the automotive, industrial, aerospace and defense, high tech and electronics and engineering sectors throughout the Columbus and Pittsburgh regions. Our extensive knowledge of industry issues enables us to provide proactive audit, tax and management consulting services.
To learn more, visit our Manufacturing Industry Group page.
