If, when you hear R&D, you think of people in lab coats tinkering with chemicals, ultra high tech industries and Fortune 500 companies, you are not alone. However, things have changed!
In 2001 the IRS changed the definition of R&D and the changes were so broad that it virtually encompasses all manufacturing or technology organization in some way.
Why is this? It’s because, by and large what do manufacturing companies do? They design new products, improve existing products, come up with new processes, or make improvements to existing processes used to make products. Most of these organizations don’t have an R&D department and probably don’t consider that what they are doing is “R&D”. They are making these improvements and changes because they MUST stay competitive and yet, as the government sees it, “R&D” is exactly what they are doing.
Here are some of the everyday activities that would qualify for the credit:
- Designing the process to fabricate the metal to reduce shrinkage and increase its quality
- Programming CNC machines
- 3D CAD Engineering with programs like SolidWorks
- Developing and testing of prototypes
- Quality assurance – First-piece quality inspections
- Designing and developing of specialty tooling and fixtures
- Considering alternative metals to develop the product
- Considering different metal thicknesses
- Developing engineering drawings
- Developing weld procedures
- Bending of metal (e.g. sheet metal) has to consider the stressing and stretching
- Considering strength of final product for application (meets specifications)
So, the next obvious question is…”How do We get some money?” The IRS allows companies to go back three open tax years to take advantage of the credits they may have missed. (Nice of them isn’t it?) Just 120 days after submitting the amended returns, you can get cash in your pocket. Additionally, you can take credits for current and future years if you continue to perform activities that qualify for this credit.
To find out if your organization would qualify ask yourself a few questions:
- Are you expecting to be profitable this year, or were you profitable in any of the last 4 years?
- Is your average annual payroll for these years in excess of $1 million?
- Is your company structure a C Corp, or an S Corp/Partnership?
If you answered yes to all of these items then you definitely need to have an R&D Tax Consulting firm take a look at your organization. You could potentially have a five-figure credit, even higher credits are available for organizations with higher payrolls.