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The American Taxpayer Relief Act of 2012 was passed by Congress and signed into law by President Obama on January 2, 2013. This law retroactively extended the Research & Development (R&D) credit through December 31, 2013. This often underutilized federal tax credit can prove to be a substantial benefit for certain manufacturers. It can also be taken by a variety of entity types (C-corporations, S-corporation owners, Partnership/LLC owners, and Sole Proprietors).

The calculation of the R&D credit is based upon qualified research expenditures (QRE’s) . The credit itself is determined by taking a statutory percentage (either 14% or 20%) of QRE’s that exceed a base amount, and may be calculated using more than one elective method. These QRE’s are generally defined as research or experimental expenses incurred in the taxpayer’s trade or business, which are undertaken for the purpose of discovering information that is technological in nature. Further, substantially all of the activities must constitute elements of a process of experimentation related to a qualified purpose. A qualified purpose is generally defined as relating to a new or improved function, performance, reliability or quality of the business component, and not relating to style, taste, cosmetic, or seasonal design factors.

In the manufacturing industry, these types of expenses are often found in the innovation and development of new products, processes and techniques. The following are examples of potential qualified activities in these areas.

Manufacturing Innovations:

  • Innovative product development using computer aided design tools Development of second generation or improved products
  • Designing innovative programmable logic controllers Prototyping and three-dimensional solid modeling

Production Processes:

  • Evaluating and determining the most efficient flow of material Improvements in Metalworking – casting, forging, welding
  • Developing new applications Improving yields

Manufacturing Activities:

  • Surface finishing technique modifications
  • Developing and testing new coating systems
  • Safety testing of product for durability and quality
  • Alternative material testing – advanced fabrics, metals

Historically speaking, the bulk of expenses qualifying for the R&D credit have been wage-based. Identifying and calculating these qualified wages and other R&D expenses can be complicated and usually requires some administrative effort. The credit can often be maximized with the help of a qualified tax professional. In addition to a federal tax credit, there are also many states that allow some form of R&D credit against their state tax. Ohio, for example, has an R&D credit available against the Ohio Commercial Activity Tax.

Don’t let this opportunity pass you by. Contact Chris Dean at cdean@gbq.com or 614.947.5232 or your GBQ advisor and take a fresh look at your manufacturing activities. You may be able to achieve substantial tax savings by utilizing an R&D credit.

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