|What Activities May Qualify for the R&D Credit?
- Engineering Process and Design
- Technical Sales Team Meetings (determining specifications to bring back to engineering team)
- Tool & Jig Making for Products
- Quality Approval & Control (beyond routine testing and general inspection)
- First Time Trial and Article Run
- Bid & Quoting Time for New and Redesigned Products
- Shipping and Packaging (new package methods to reduce breakage or damage)
- Design Meetings (informal or formal brainstorming and tinkering time)
What Are Some Common Misunderstandings in Taking the R&D Credit?
1. We are usually able to sell the prototype for a profit, so it won’t be eligible for the R&D Credit…
Many manufacturers develop prototypes that require new materials and capabilities. These prototypes often have trial runs to resolve underlying technical uncertainties of the product or process development. These expenditures could be eligible for the R&D Tax Credit. Even though the prototype can either be sold or used in manufacturing, the underlying costs could still qualify. As long as there is an engineering-based uncertainty, the ultimate success of the failure, whether it is scrapped, or the sale or use of the product is irrelevant.
2. We haven’t created any new products, all we’ve done is some lean manufacturing or created an ERP system…
Costs to develop new manufacturing processes or improving existing ones can often qualify for the R&D tax credit. Lean manufacturing activities such as evaluating the effect of process improvement on quality of products, reducing costs and environmental impacts; and improving throughput, safety and waste stream disposal. Additionally, ERP implementations are often complex and are rarely simple and routine.
Manufacturers consistently create and improve products and processes, making them eligible for the R&D credit. While not all activities and projects will qualify, the R&D credit is worth considering as it could provide a lucrative benefit.
About the Author: Lacey Robb is the R&D Tax Credit Practice Leader for ICS Tax, LLC. She is an attorney and has an LLM in Taxation and has helped numerous taxpayers in a variety of industries take the R&D tax credit. She can be reached by phone at 310-968-0970 or by email at email@example.com. To learn more about the R&D credit and other specialized tax planning strategies, visit www.ics-tax.com.