Research & Development Tax Credit 101
Tax reform — such as the Tax Cuts and Jobs Act — created many opportunities and the Coronavirus Tax Relief for Businesses helped many small business owners and employees during the pandemic; however, the Research and Development (R&D) Tax Credit is one of the easiest ways for companies to reduce income liabilities while improving capabilities and maximizing output. The R&D credit often saves companies hundreds of thousands of dollars. It's a way to make sure great products are Made in America.
We'll cover the basics in this installment, but keep your eyes open for our next post where we'll cover four of the most common misconceptions about the R&D Tax Credit.
What is the R&D tax credit?
Let's start with the basics: The R&D tax credit is available to companies developing new or improved business components. This includes new products, processes, computer software, techniques, formulas, or inventions. Basically, the credit covers anything that results in new or improved functionality, performance, reliability, or quality.
Interested in purchasing new equipment to improve product quality? It fits under the guidelines established for the R&D credit.
The R&D Tax Credit is a dollar-for-dollar tax savings that directly reduces your company's tax liability. There is no limit to the amount of expenses and credit that you can claim each year. In fact, if the federal R&D credit can't be used immediately, then the unused credit can be carried back for one year and forward for up to 20 years. State carryover rules vary. (Source: MossAdams).
Is the R&D tax credit a federal or state credit?
The R&D Tax Credit is available at the federal level. However, many states also offer an R&D credit to offset state tax liability.
Is my company eligible?
The credit is much broader than many CEOs realize. The credit covers much more than research and product development. It encompasses operations, new manufacturing processes, software development, quality enhancements, and more. Start-ups may even be eligible to apply the credit towards payroll for up to five years!
Your company may be eligible for the R&D tax credit if:
- It designs and develops processes or patents or prototypes new products
- It creates or allocates time and resources to new product development.
- If the purchase improves product quality or improves existing products
- If you hire product developers, designers, engineers, or scientists
Are these credits retroactive?
Uh oh. Just bought a new piece of equipment? Made an investment in a new manufacturing process? Well, you might be in luck. Depending on when you filed your business tax return, you may still be able to claim the credit for the three prior open tax returns. Laws vary depending on your company's circumstances and by state. Ask your tax specialist for more information.
Do FluidFormed product qualify?
Again, maybe! In fact, we'll go so far as to say: probably, yes! Ask your tax specialist whether or not the R&D Credit is right for you. In most instances, parts that are manufactured with FluidForming hydroforming achieve higher tolerances and greater accuracy. Our parts are typically stronger, lighter, more precise. This means they out-perform components made with conventional metal forming methods.
Can I claim the R&D Tax Credit on the Purchase of a FluidForming FormBalancer metal forming machine?
Yes, you should be able to claim the credit when you purchase equipment that improves existing processes or products.
The FluidForming sheet metal forming process — and the FormBalancer family of metal forming machines — manufactures parts that exhibit a greater strength than that of conventionally welded joints or components. Other potential benefits of the process include increased component rigidity, reduced dimensional variability, a reduction in the number of parts, and a reduction in the number of joints per component.
For more information about FluidForming, call 1-800-497-3545 or email us at firstname.lastname@example.org.
FluidForming Americas, Inc. is a member of the Precision Metal Forming Association and is AS9100 Rev D, ISO 9001:2015 certified.