September 12, 2014

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CBIZ Voice: R&D Tax Credits For Manufacturing & Processing Improvements

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CBIZ Voice: R&D Tax Credits For Manufacturing & Processing Improvements

By Clair Rood and Mike Silvio

September 12, 2014

Making improvements to a production or manufacturing process, designing a new product, or other forms of Research & Development (R&D) will often result in increased operating costs. However, your investment in R&D may have also made your company eligible for significant tax and cash flow benefits.

R&D tax credits can increase cash flow and improve a business’ bottom line by as much as one hundred thousand dollars or more. In practical terms, this means your business can recoup a portion of what it has incurred to fund research and development activities. This tax credit takes the form of either refunds of previous taxes paid or a reduction in current and future tax bills. You should also analyze R&D tax credit positions for the purpose of FIN 48 implementation. In essence, the Federal government wants to partially subsidize your business activities in order to stimulate economic growth and innovation.

To take advantage of tax breaks available to you for money invested in R&D, you need to apply the rules supporting this credit to both product and process activities and file the appropriate paperwork.

There are a great deal of variables involved in the development, manufacturing and processing of products on a large scale. Initiatives that may qualify as R&D include:

  • Developing packaging to improve product quality
  • Developing formulas
  • Developing cost/energy efficient manufacturing processes
  • Improving nutritional content and texture of food products
  • Developing processes that convert waste to energy
  • Prototype modeling
  • Testing / confirming new designs, machine procedures, computer controls
  • Optimization of the tooling process
  • Designing and evaluating process alternatives
  • Increasing operating and economic efficiencies
  • Reducing labor costs
  • Achieving compliance with changing emissions laws and regulations
  • Implementing automated processes

The Impacts of Tax Credits for Today’s Businesses

In an ever-changing global economy, Congress and many state governments have passed incentive programs such the R&D tax credit in an attempt to assist U.S. businesses in remaining strong and ahead of the global technological curve.  However, many believe that Congress has not done enough.  Approximately 25 countries around the world offer various incentives to promote innovation within their country.  These incentives take various forms which can include credits, deductions, subsidies, tax exemptions and reduced tax rates for qualifying activities.

Some countries provide higher credits than the U.S. and double deductions for research activities. With countries all over the world competing in this way to capture and retain innovative businesses, the United States Government must do more to attract and retain innovation.  Many people believe that the R & D credit is not robust enough to retain and promote innovation within the United States over the long term.  Many proponents of the R & D credit, such as the R & D Credit Coalition in Washington, D.C. are calling for Congress to act to enhance the credit and make it permanent.

As of December 31, 2013, the Federal R & D tax credit has expired, thus strengthening the belief that Congress is not doing enough to promote and reward U.S innovation.   During the period where no credit existed, such as now, U.S. businesses are not able to use the credit as a tool to assist in setting R & D budgets.  This is difficult on businesses to essentially ask them to make determinations on R & D spending when there is currently no guarantee that any of the dollars that they are currently spending will be recouped on their Federal income tax returns.  While the R & D credit currently enjoys bipartisan support in Congress, and the credit has expired and been renewed many times since its debut in 1981, it is an election year and, it is likely that Congress will wait until after the elections before renewing this credit.

While Congress has yet to renew the federal R&D tax credit law for 2014, many entrepreneurs should be taking advantage of the existing federal R&D tax credits that may still be available for the past three tax years.  For this reason, it is critical that certain companies look at their 2010 federal tax year and generate credits before they expire. Since there is a three year statute of limitations for federal purposes on the tax return, the 2010 federal return is likely to expire some time during 2014. Time is of the essence because an update to the use of the credits during 2010 can, in certain circumstances, make the credits for that year more valuable and easier to use. 

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