Is it time to revisit the R&D credit?
Brandon W. Vahl, CPA, CFE
The federal tax credit for increasing research and development activities — popularly known as the R&D credit — can be a valuable break for manufacturers. Eligible companies can reduce their tax liability by as much as 7.9 cents (or more if state research credits are available) for each dollar of qualified research expenditures on wages, supplies, consulting fees and contract research. Unfortunately, many manufacturers lose out because they underestimate their R&D expenditures or believe their taxable income is too low to make it worthwhile.
Not just for scientific research
Many people associate R&D with biotech and pharmaceutical companies, but the credit is available to many types of businesses. Generally, qualifying research must:
- Be related to development or improvement of a product, process, software program or other “business component;”
- Attempt to eliminate uncertainty over whether, and how, the business component can be developed or improved;
- Involve a “process of experimentation,” using techniques such as modeling, simulation or trial and error; and
- Be technological in nature, meaning it relies on engineering, computer science or “hard sciences,” such as biology or chemistry.
Qualified research expenditures don’t need to lead to innovations that are new to your industry, but the changes must be new to your company. For manufacturers, this may include:
- Developing new products;
- Redesigning products to make them cheaper, cleaner or more durable;
- Redesigning processes to make them more efficient, safer or less wasteful;
- Experimenting with new packaging materials or techniques that reduce costs, avoid waste or minimize environmental impact;
- Developing or improving robotics or other automated technology;
- Optimizing tooling or equipment placement; and
- Developing software or other methods for improving quality control.
These are just a few examples, but they give you an idea of the broad range of eligible activities.
Expanded benefits for start-ups and small businesses
There’s another reason to revisit the R&D credit: Legislation enacted in 2015 expanded the credit’s availability by allowing start-ups to offset R&D credits against up to $250,000 in payroll taxes. Start-ups are generally businesses in operation for less than five years with less than $5 million in gross receipts.
The legislation also allows small businesses (those with average gross receipts of no more than $50 million) to use the credit to reduce their alternative minimum tax (AMT) liability. Note that 2017’s Tax Cuts and Jobs Act eliminated corporate AMT, but owners of pass-through entities may still benefit from the change.
Worth another look
If your company hasn’t been claiming R&D credits, it’s time to revisit the potential benefits. If available, the credit can boost your cash flow by reducing your tax liability. And you may be able to claim credits you missed over the last few years by filing amended returns.
Tariffs: Six strategies for protecting your company
Kenneth Tornheim, CPA, CFE
Tariffs on imported materials, such as steel and aluminum, are increasing costs for many manufacturers. Here are six ways to help evaluate and manage the effects on your business.
- Scrutinize Your Supply Chain
Determine whether, and how, tariffs affect you. Analyze your supply chain to identify the countries from which materials and components originate. This isn’t always immediately apparent, especially if you buy materials from distributors or service centers.
- Identify Alternative Sources
If your materials costs are subject to tariffs, consider alternative sources that aren’t affected by tariffs. Don’t switch unless these sources can supply you with materials of comparable quality in the quantities you need on a timely basis.
- Buy in Advance
Stock up on materials before tariffs take effect, if possible.
- Increase Prices
Some manufacturers are taking a wait-and-see approach, absorbing increased costs in the hope that the “trade wars” will cool off soon. Others are increasing their prices and passing these costs on to their customers. As you review your options, research what your competitors are doing and communicate with your customers before imposing price increases.
- Reduce Costs
Examine cost-cutting strategies. Examples include implementing just-in-time inventory or lean manufacturing techniques, redesigning products or packaging, or reducing overhead and administrative costs.
- Use Contract Manufacturing
You may be able to avoid or reduce tariffs by partnering with contract manufacturers in other countries to avoid importing affected raw materials or components.
Avoid knee-jerk reactions
These are just a few of the potential strategies for minimizing the effects of tariffs. Whatever you decide to do, avoid hasty reactions and carefully evaluate the potential risks and benefits of each option.