In today’s competitive global marketplace, manufacturers must constantly innovate in response to evolving customer needs. The companies that do this will more than likely end up performing activities that qualify for Research and Development (R&D) tax credits.
Opportunities for Growth
Sikich’s 2018 Manufacturing Report found that 28 percent of survey respondents view new product or service development as their top opportunity for growth. New products can effectively drive organic growth and allow a manufacturer to take advantage of R&D tax credits.
Advantages of the Credit and How to Qualify
For small and midsize manufacturers, R&D tax credits can often be as high as $50,000 to $100,000 annually, resulting in a significant influx of capital into a manufacturing operation that can fuel ongoing innovation and growth. Oftentimes, manufacturers don’t realize that they perform activities that qualify for the credit. There’s a common misconception that a company must invent an entirely new product–never before seen in the industry–to qualify for the credits. However, if a manufacturer introduces a product that’s new to their product line or even materially enhances their existing product, it could qualify for the credits.
By taking full advantage of the credits, manufacturers will have more capital available to deploy, which could benefit their businesses. In addition, manufacturers can retroactively receive the credit for years that fall within the statute of limitation. So, even if a manufacturer hasn’t applied for the credit, they have an opportunity to benefit for activities they completed prior to the current year.
Taking the Next Step
The manufacturers that work hard to improve their products to better serve customers are leaving money on the table if they neglect to take advantage of R&D tax credits. By working with your trusted CPA advisor, you will better understand the criteria involved in determining whether your company qualifies for the credits and if you should apply for them. In many cases, your CPA advisor will seek outside counsel from organizations with engineering expertise that specialize in these studies. Together, they can thoroughly assess your organization’s R&D activity and create a comprehensive report that is designed to stand up to scrutiny by taxing authorities.
Other Opportunities for Manufacturers
The 2017 Tax Cuts and Jobs Act offers benefits to manufacturers, including lower tax rates and opportunities for additional tax savings related to capital investments. The law lowered tax rates for C-corporations from 35 percent to 21 percent. Non-corporate entities can take advantage of a 20 percent deduction for “qualified business income” (for more information on this 20 percent deduction, please reference this article).
Additionally, the law presents opportunities for tax savings when it comes to capital expenditures. The law allows for 100 percent bonus depreciation for new or used property acquired and placed in service after Sept. 27, 2017. This provision, combined with changes in Section 179 expensing rules, gives manufacturers the opportunity to fully write off their fixed asset acquisitions and generate significant tax savings.
For more information on R&D tax credits and how your business can qualify, contact our manufacturing tax experts.