By Kari m A . Solanji , & Saqib Dhanani
Approximately eight out of 10 machine shops, weld shops and manufacturing firms across the nation are missing out on hundreds of thousands of dollars in manufacturing credits every year.
This substantial manufacturer’s cashback incentive known as the R&D Tax Credit is being ignored by companies nationally for several reasons.
The primary reason for its neglect is simply that manufacturers do not understand that their day-to-day activities including product design, development or improvement qualify for the credits.
Research and Development is generally understood by its literal meaning; research facilities occupied by scientists experimenting with various chemicals.
By this definition, a machine shop, for example, would not have any qualified activities.
However, that is not the definition as adopted by the IRS. The IRS defines Research and Development simply as the design or development of a new or improved product or process.
This clearly includes machine shops, welding shops and other manufacturing firms as one of many industries that partake R&D on a daily basis, whether they know it or not.
R&D activities Daily R&D activities include conceptualization and the design of new or improved products using activities such as CAD modeling. In addition, activities related to CNC machining are a regular activity considered by the IRS as R&D.
Other qualified activities include:
• Laser technology.
• Electro mechanics.
• Vibratory de-burring.
• And, such processes as hardware insertion.
Companies typically perform these listed activities on a daily basis.
The R&D tax credit is one of the largest credits available. It is a 20 percent cash-back, wage-based credit. The IRS also allows companies to go back three open tax years and claim the credits for these previous years.
The best way to paint the picture is by detailing an actual case study. A Texas machine shop performs the following qualified activities:
• CNC precision machining
• CAD modeling
The shop’s total payroll for tax years 2003 thru 2006 is $4 million, or approximately $1 million per year. This company also has a net R&D benefit of $100,000.
However, this begs the question: If this credit is so beneficial to manufacturers and machine shops, why haven’t their CPA’s told them about it?
Most qualifying company owners, after learning about the manufacturers’ credit, tend to wonder why their CPA failed to calculate this on their behalf.
However, it is by no means the CPA’s fault. Most CPA’s recognize that to accurately calculate and substantiate the credit, a highly detailed engineering report explaining a company’s qualifying activities also must be prepared.
This report often is too technical for a CPA because they would be unfamiliar with a clients particular technology. To truly take advantage of and maximize the credit, it takes a specialized tax engineers to fully understand each Companies products and processes. Nevertheless, several additional questions would come to a machine shop, weld shop or manufacturing firm owner’s mind.
One of the most frequent is: Don’t companies need accurate time sheets since it is a wage-based credit?
The answer is no. Qualifying companies do not need accurate time sheets for each employee.
The government recognized in 2001, that a majority of innovation in the U.S. was coming from small to mid-size firms. It also understood that these smaller to mid-sized firms simply could not afford the IT infrastructure that is required to keep track of this time. It is therefore the job of the specialist company preparing the study to account for the time spent on qualifying activities.
As a result, many companies around the nation are overlooking the R&D tax credit.
Everyday though, more and more companies realize the opportunity and take the necessary steps to receive these credits.
With the difficulty of understanding and properly substantiating the credit, many companies have hired R&D specialists to assist them in capturing these credits, and it usually takes 4 hours to 6 hours of cumulative company employee time, from someone such as a a head engineer or shop foreman, and three weeks to four weeks of the specialists’ time to produce a detailed report accounting for the products and processes that the company develops.
In addition, the report also includes the calculations required to capture the benefit. Once the appropriate forms are sent, it usually takes three months to four months for the companies to receive a checks for the credit from the IRS.