Your custom set-up procedures require continuous testing to improve the process, so they could meet R&D requirements. By documenting these processes and the time spent by all individuals involved, you may be in line for valuable tax credits that could help you grow your business.
It's a situation manufacturers are very familiar with: the customer communicated the requirements of the specific part or product using CAD files or prints, final verification of the tool tryout process is completed, and now it’s time to move the tool to the production floor.
Here's where your production set-up process becomes is critical. As you go through each step, be sure to document the activities of all personnel involved in the process.
Here are some examples of potentially qualifying activities that may be more valuable than you realized:
It's important to note that once a process has been developed, future production set-ups would not be eligible for an R&D tax credit unless the process has been improved for cost, quality, or reliability. In other words, your set-up process has to meet the "Four Part Test" in order to qualify for R&D tax credits.
To earn R&D tax credits, your custom production set-up must pass the Four-Part Test. This gauges your process against four criteria (permitted purpose, technical uncertainty, process of experimentation, technological in nature) to determine whether they meet the established research and development requirements.
In general, qualified activities would include any actions taken to complete the set-up for the first attempt of a production or trial run. This includes any activity performed by engineers, tool makers, quality specialists, and all other personnel involved in the set-up process. All time related to manufacturing a first quality part would also qualify.
Unqualified activities would involve any set-up for repeat orders of existing products with no significant design or tooling changes.
Chances are your production set-up processes already qualify you for R&D tax credits. So, if you're not documenting your process and working with a tax professional to secure those credits, you're essentially leaving money on the table. By simply analyzing your process and recording the actions taken by your production set-up personnel, you can earn valuable credits that can keep you competitive and improve your business.