Did you know that you do not have to be developing a new product that is going to be patented to qualify for the Federal Research and Development Tax Credit? While the activities that develop new products that are patented do qualify for the R & D Credit, most manufacturers likely have some additional expenditures that qualify for the credit. Manufacturers should look into whether their activities qualify for the R & D Credit because, if for no other reason, your competitors are doing it!
To support the U.S. manufacturing sector, Congress and the President extended through December 31, 2011 the Section 41 Credit for Increasing Research Activities (commonly known as the Research and Development Credit) in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.
The tax definition of research and development for the credit has 4 elements:
- 1. New or improved business component
- 2. Technological in nature
- 3. Elimination of uncertainty
- 4. Process of experimentation
Most manufacturers probably do things that qualify as a new or improved business component. These would include a new product, process, software, technique, formula or invention. In the manufacturing environment, this can include:
- Developing or improving production and manufacturing processes;
- Developing prototypes or models;
- Developing new, improved or more reliable products;
- Attempting to use new compounds or materials;
- Conducting testing of new concepts and technology;
- Performing environmental testing;
- Automating or streamlining internal processes; or
- Designing tools, jigs, molds and dies
The technological in nature component is based on the process of experimentation used in the research and relying on the principles of hard sciences, such as physical or biological sciences, engineering or computer sciences. The elimination of uncertainty component involves the research and development activity eliminating the uncertainty either about the capability or method of developing the product. The process of experimentation involves the evaluation of one or more alternatives where there exists uncertainty at the outset.
If your business has activities that qualify for the R & D Credit then a percentage of your wages, supplies and contract research can be taken as a tax credit. The net benefit is as high as 6.5% of the qualified expenses. There are also state credits that can add onto the tax savings. One other important consideration is there is the opportunity to perform an R & D Tax Credit study for all open tax years and file amended returns to capture credits from those years. For more Manufacturing Tax Tips on taking advance of this tax credit, click here.
For more information, contact Jim Gilboy at firstname.lastname@example.org or your Schneider Downs tax advisor with any questions that you might have.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.