September 26, 2018
By Glenn Kerrick, President & CEO North America
According to the U.S. Census Bureau, Statistics of U.S. Businesses, equipment manufacturing is one of the largest and most competitive sectors of the U.S. manufacturing economy. Tens of thousands of companies manufacture equipment in the United States, with most of them being quite small.
Given the fragmented and competitive nature of this industry, equipment manufacturers need to provide clients with the most updated machinery possible, all while keeping costs in check. Without innovation, streamlined processes and continuous product improvement, it is very easy for equipment manufacturers to fall behind and lose market share. One way to offset the cost of improving products and processes is through R&D tax credits.
While the R&D tax credit has been permanent since 2015, many equipment manufacturers are not yet claiming it, and those that are may not be claiming everything they are entitled to. Considering the broad range of eligibility criteria, and the fact that the tax credit can be claimed for the current year as well as retroactively up to three years back, this can add up to significant funding that can have a direct impact on the bottom line. Also, with the introduction of the Tax Cuts and Jobs Act (TCJA) in 2017, more advantages have been created for companies to claim.
Here are some probable reasons why equipment manufacturers may be leaving valuable funding on the table, and a guide on best practices to follow to avoid underclaiming R&D tax credits:
- The More You Know, The More You’ll Grow: Many established equipment manufacturers’ view of R&D may be skewed toward newly-patented inventions and laboratory experiments rather than day-to-day manufacturing. However, activities do not need to be revolutionary to be eligible. Most activities and supplies linked to the development, and more importantly, to the improvement of a product or process may qualify for the R&D tax credit. Manufacturers’ internal IT projects can also render them eligible for R&D tax credits, including ERP integration, SCM deployment, analytics and BI development. These are only a few areas that equipment manufacturers may not be considering when evaluating eligibility.
- Made Just for You? That Qualifies Too: Equipment manufacturers are often hired by other companies to produce custom tools that serve a client’s specific needs. Given that the manufacturer is being paid by another company to develop the product, and due to the tailored nature of the research involved in prototyping and building it, many equipment manufacturers assume that this type of project does not qualify for further funding through the R&D tax credit. However, these custom developments can fall into the realm of eligibility, and they should certainly not be automatically discounted without having an expert review them.
- Time Is Money: Activities and supplies are not the only things equipment manufacturers may be overlooking when it comes to claiming R&D tax credits. Manufacturers may not be aware that the wages for everyone involved in a project, including support expenditures such as operators, maintenance people, executives, administrative staff may be eligible for R&D tax credits. When preparing a claim, it is imperative to review the time dedicated to bringing a project to fruition, and the wages a company had to disperse for progress to occur. However, qualifying wages are dependent on many factors, and it is important to have an R&D tax credit expert analyze what can and cannot be claimed for a certain project or activity.
- TCJA Does Not Mean Tax Credits Go Away: The good news for American manufacturers is that the R&D tax credit program has been retained under the TCJA. This is a further indicator of the program’s permanence, and acts as an incentive for companies to integrate it into their R&D planning. Since many equipment manufacturers fall into the small or medium enterprise category, they bear the misconception that they are too small to claim the R&D tax credit. While it is true that historically the tax credit did favor large corporations, changes have been adopted over the past few years that now make it a very attractive incentive for smaller companies to invest in innovation and continuous improvements. Until 2015, R&D tax credits could not be used to offset the alternative minimum tax (AMT). Beginning in 2016, companies with annual revenue of $50 million or less were no longer limited by the alternative minimum tax (AMT), and effective for the tax year ending after December 31, 2017, the corporate AMT was eliminated entirely.
- Equipped for Growth Through the R&D Tax Credit: While most equipment manufacturers are already performing eligible activities, identifying and documenting them according to government requirements can be challenging. Claiming the R&D tax credit can yield significant funding towards past and future investments and projects, but the activities must be properly positioned and supported. In addition to the federal R&D tax credit, most states also offer R&D tax credits that can yield additional funding. However, each state has its own requirements and criteria as well, so it is critical to be fully aware prior to producing a claim.
Glenn Kerrick, Managing Partner – North America
Glenn has over 25 years of experience helping companies grow on a global scale within the context of rapidly changing markets and quickly evolving technical and business environments. Prior to joining Ayming in October 2012, Glenn held senior leadership positions with a number of leading companies including Accenture, Emergis, NSB Group, and Avanade. Glenn is passionate about helping companies innovate, and is focused on client satisfaction and operational excellence. He holds a Bachelor of Electrical Engineering from McGill University and began his career in R&D with Bell-Northern Research. firstname.lastname@example.org