R&D Tax Credits for Manufacturers

R&D Tax Credit | December 11, 2020 | 7 min read

A majority of eligible manufacturers fail to take advantage of America’s largest tax incentive. In 2016 alone, nearly $16 billion in R&D tax credits were claimed, yet manufacturers continue to leave money on the table by not claiming the research and development tax credits made available to them. The primary reasons manufacturers aren’t claiming R&D tax credits are they either don’t know the credits exist or don’t believe they qualify to claim the R&D tax credits. Manufacturers may also be unaware of some recent changes in the R&D tax credit laws that have expanded the scope of the program so that more taxpayers are able to claim R&D tax credits than ever before. The R&D tax credit encourages innovation in manufacturing. Whether you are in the business of manufacturing a new product, or are in the business of improving the manufacturing process itself, you are likely eligible for the R&D tax credit. The best way to learn whether your manufacturing business is eligible to claim R&D tax credits is to work with an experienced and well-qualified R&D tax credit consultant. Schedule a free consultation with Clarus R+D to learn more about the benefits of the R&D tax credit program or to discuss whether your business is eligible. Clarus’ technology-driven solution empowers companies to fuel their growth with America’s largest tax incentive.

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Manufacturers can claim R&D tax credits

The R&D tax credit is the biggest tax incentive available to manufacturers. Since its introduction in 1981, the R&D tax credit has expanded so that more and more manufacturing businesses across many industries are able to claim the tax credits. In order for your manufacturing business to be eligible to qualify for the R&D tax credit, it must engage in certain qualified research activities.

Clarus R+D has worked with manufacturers across the country to help them claim the R&D tax credit. Examples of manufacturing activities and innovations eligible for the R&D tax incentive include:

    • Innovating product development using computer-aided design tools
    • Developing second-generation or improved products
    • Designing innovative manufacturing equipment
    • Prototyping and three-dimensional solid modeling 
    • Designing and developing cost-effective and innovative operational processes
    • Integrating new materials to improve product performance and manufacturing processes
    • Designing and evaluating process alternatives
    • Achieving compliance with changing emissions laws and regulations
    • Streamlining manufacturing processes through automation
    • Improving product quality and yields
    • Reducing manufacturing times and optimizing manufacturing processes
    • Development of second-generation products
    • Product development using computer-aided design tools
    • Tooling and equipment fixture design and development
    • Designing, constructing, and testing prototypes
    • Alternative material testing
    • Evaluating and determining the most efficient flow of material
    • Increasing manufacturing capabilities and production capacities

I encourage any entrepreneur or company with significant dev expenses to pursue the R&D tax credit. The ROI compared to the amount of time spent is worth it.

Jeff Wilkins / FMX

You don’t have to be among the largest manufacturing companies to take advantage of the research and development tax credit. Small manufacturers and startups are even eligible to claim the R&D tax credit. In fact, recent changes to the applicable laws have made it easier than ever for more manufacturing businesses to take advantage of the R&D tax credit.

Learn how your business can claim the R&D tax credit

Benefits of R&D tax credits for manufacturers

The research and development tax credit is a government-sponsored tax incentive available to companies who conduct research and development within the United States. The credit was implemented as a Congressional response to the decline in research spending which negatively impacted the Country’s economic growth, productivity gains, and overall global competitiveness. The R&D tax credit was initially implemented in 1981 and has since been reauthorized several times. In 2015, when the Protecting Americans from Tax Hikes (PATH) Act was adopted, the Research and Development (R&D) credit became a permanent part of the tax code

Many manufacturers assume the R&D tax credit is available only to major corporations conducting tests in research laboratories. This, of course, is not the case. Businesses, including manufacturers of all sizes across many industries, are eligible for the incentive as long as they are engaged in qualified research activities. Under the current tax code, any company that develops or improves products or processes may be eligible for the credit. The number of manufacturers who engage in eligible activities is ever-increasing as are the eligible activities that qualify a business for the credit. More and more businesses are engaged in qualified research activities making them eligible for the R&D tax credit. Clarus R+D is your tax credit consultant of choice to help your business take advantage of the research and development tax incentive.

Many manufacturers are unaware of the tremendous benefits of R&D tax credits. The manufacturing expenses related to daily operations could qualify for a dollar-for-dollar tax credit towards their annual income and/or payroll tax liability, irrespective of industry or manufacturing company size. Additionally, most states offer an R&D tax credit that can supplement the federal R&D tax credit.

For most companies, the credit is worth 7-10% of qualified research expenses. This is a dollar-for-dollar credit against taxes owed. Plus, it carries forward 20 years. For startups, applying the credit against payroll taxes is a valuable, non-dilutive funding opportunity. Eligible expenses for the R&D tax credit include U.S.-based wages, contracting, and supply costs. Most typically, wages are the largest qualified expense, and there must be nexus between the expense and qualified project.

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Manufacturing and R&D tax credit eligibility

Working with a professional R&D tax credit consultant, like Clarus R+D, is the best way for you to determine your tax credit eligibility. In order to be eligible for the research and development tax credit, your manufacturing business must engage in qualified research. Qualified research generally is private sector or commercially driven development intended to yield innovation within a scientific or technological field. The following four-part test determines whether an activity is considered qualified research and, thus, eligible for the R&D tax credit.

Permitted Purpose

The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component. A business component is defined as any product, process, technique, invention, formula, or computer software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.

Elimination of Uncertainty

The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, method of development or improvement, or the appropriateness of the business component’s design.

Process of Experimentation

The taxpayer must undergo a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain as of the beginning of the taxpayer’s research activities. Treasury Regulations define this as broadly as conventional implementation of the scientific method to something as informal as systematic trial and error process.

Technological in Nature

The process of experimentation used to discover information must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science. A taxpayer may employ existing technologies and may rely on existing principles of the physical or biological sciences, engineering, or computer science to satisfy this requirement. Research activities that qualify for R&D tax credits must be conducted in the U.S. If your business does any of the following, it likely qualifies for the R&D tax credit:

      • Develops or designs new products or processes
      • Enhances existing products or processes
      • Develops or improves upon existing prototypes and software

Exclusions

Even if your work passes the four-part test, there are a few exclusions to the R&D tax credit. Expenses incurred under the exclusions will not qualify for the incentive. Some of these already appear in the four-part test, including the need to rely on hard sciences. The activity must take place in the U.S. and cannot include routine data collection or market research. Also, activities cannot receive funding from an unrelated third party because your company might not retain ownership of the resulting intellectual property. 

Clarus R+D will work with you to help you understand what is considered qualified research for purposes of determining R&D tax credit eligibility.

Learn more about R&D tax credits

Manufacturing process: Activities that may qualify for R&D tax credits

Sales 

A sales team is on the frontline of data collection regarding new products and processes. As such, your sales team is an integral cog in the wheel of innovation. The information they collect is shared with various departments including your engineering and design teams. Those sales activities may be eligible R&D tax credit expenses you can claim.  

Design 

The time spent designing a product or innovation is going to be considered an R&D tax credit eligible activity, absent some specific exclusion. The manufacturing process begins with the product design and materials specification from which the product is made. These materials are then modified through manufacturing processes to become the required part. The design process includes design meetings as well as time spent quoting a project.  

Manufacturing Process

This is fairly straightforward. In general terms, manufacturing-related R&D encompasses improvements in existing methods or processes, or wholly new processes, machines, or systems. The time associated with those activities is going to be R&D tax credit eligible.

Quality Control

Quality control for the innovative product or process is R&D tax credit eligible.  This includes testing to ensure the product or process is free from defect and performs according to specification.  

Shipping and Package Design

If the product requires a unique container for shipping, the time devoted to designing, testing, and improving the new packaging could qualify as R&D tax credit eligible.

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R&D tax credit consultants: What to expect

Working with a professional R&D tax credit advisor is the best way to determine eligibility and maximize your benefit. Here is what you can expect by selecting Clarus R+D as your R&D tax credit consultants:

      • Clarus R+D provides a team of professionals with expert credentials able to answer all your R&D tax credit questions.
      • Our proprietary software streamlines R&D studies which maximizes your ROI.
      • Clarus has expert knowledge of the IRS regulations relating to the research and development tax credit, IRC Section 41, as well as the regulations pertaining to state-specific research and development credits.
      • Clarus has extensive experience in recognizing qualified research activities and expenditures.
      • Our time-proven methodology has yielded maximum benefits to our clients.
      • The Clarus team has helped hundreds of clients claim millions in R&D tax credits.
      • We place emphasis on helping growth businesses take advantage of the tax incentive.
      • Clarus does the work for you; our web-based app allows you to enter information at your own pace.
      • We have extensive IRS and state audit experience and provide our clients with audit support.
      • We have maintained an exceptional success rate in applying for the R&D tax credit.
      • We work directly with our clients and their respective accounting firm and payroll processor.
      • Our process saves valuable time and resources within the engineering and finance departments.
      • Our fees are very competitive.
      • Our performance, success rate, and unparalleled quality of service result in high client loyalty.

Learn more about R&D tax credits

Ready to get started?

Schedule a free consultation with our team of experts to learn more. We’ll discuss the R&D tax credit and help you determine if our solution is a fit for your company.

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Clarus R+D gave us tremendous ROI. Easy software. Helpful people. Reasonable fees.

Richard Cumberland / Zupt

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ABOUT CLARUS R+DWith custom software backed by a team of tax experts, Clarus R+D specializes in tax credits for growth businesses. Our technology-driven solution simplifies the process, maximizes benefit, and ensures compliance. We partner with accounting firms, financial advisors, investors, payroll providers, and more.

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