The U.S. R&D tax credit could be worth up to $10 billion annually to small and large firms. Yet evidence shows that only one of out of 20 small and medium-sized companies eligible for this credit actually use it. Why is that? It seems there are myths surrounding the credits that dissuade smaller companies from filing for them, according to Rizwan Virani, managing director of Alliantgroup (www.alliantgroup.com). His group, an organization of business and CPA firms, encourages U.S. businesses to take full advantage of all available federal and state tax credits, incentives, and deductions. Here, Virani unwraps several of those myths:
Myth #1: The R&D tax credit is only for companies inventing something new. The R&D tax credit is not just for inventing a better mousetrap or getting a patent. It is also available to and most typically used by companies improving or modifying products or manufacturing processes. This makes manufacturers good candidates for the R&D tax credit.
Myth #2: The tax credit is only for companies with labs staffed by white-coated scientists and engineers. Although companies doing basic research are prime candidates for this tax credit, the credit also goes to firms doing applied science, that is, solving customer problems or production issues using scientific principles. For example, a manufacturer recently earned $265,000 in federal and $16,000 in state credits for improving die casting, metal stamping, and precision-tools development processes. These funds were for improving the work the company did on a daily basis.
Myth #3: The tax credit is only for big companies. While big companies and their tax lawyers are all over the R&D tax credit, small and medium companies often act as if something was barring them from looking at it. There isn’t. The R&D credit is for small and medium businesses, but they need to show up and apply for them.
Myth #4: The R&D tax credit isn’t for companies in my industry. Thousands of manufacturers can secure the R&D credit for any number of eligible activities, including iron casting, sheet-metal plating, hot stamping, injection molding, plastics, modeling, and more. Company auditors and accountants who don’t think their companies qualify for the credit should check the rules on the books.
Myth #5: The R&D tax credit won’t help with state taxes. Not so fast. Thirty-eight states have a state R&D tax credit—and several states are looking at expanding theirs or creating one. Alliantgroup says it has worked with several companies that have been able to use state R&D tax credits to eliminate or significantly reduce state income taxes. For instance, a manufacturer of injection-molded components earned not only $154,000 in federal credits, but also $178,000 in state credits for its work. In most cases, if your company is eligible for the federal credit, it should also benefit from the state credit.
Myth #6: The R&D tax credit won’t help the bottom line. The R&D tax credit was created with the manufacturing industry in mind to find federal and state tax savings ranging from tens of thousands of dollars to well over $1 million. For instance, a steel-ring manufacturer recently bumped up its bottom line with $406,000 in federal credits for product design improvements. And a plastics molding company added $116,000 in federal and $91,000 in state credits to the plus column.
Myth #7: It’s too good to be true. The R&D tax credit benefits thousands of companies in a wide range of industries every year. The credit has been part of the IRS Code since 1981. But the IRS isn’t giving away this tax credit; you need to properly document your activities and correctly apply the law.
Myth #8: We are going to have tax reform and the R&D tax credit is going away. The R&D tax credit has great support in Washington, D.C., from both parties and the current administration (and by every previous administration since it was put in place in 1981). All indications are it will stay in place even with tax reform. In fact, a recent string of court cases have expanded the scope of the R&D credit, further stretching its reach in the manufacturing industry.