As the CPA for a manufacturer, it's your job to provide the financial expertise to help the company increase margins and maximize growth. To do that, you need to make sure you understand the business well enough to identify areas for potential savings, particularly those that qualify for the research and development tax credit.
Whether it's design conception, production line set-up, or even packaging, R&D in the manufacturing space can cover a broad range of activities. By understanding the ins and outs of manufacturing R&D, you can position your client for the best possible outcome.
Qualifying Expenses
While it's true that qualifying R&D activities really do run the gamut of manufacturing operations, there are a number of common areas that are most likely to pass the IRS's requirements. We've listed a few below. If your company is spending time on any of the following activities, those expenses likely qualify for the R&D tax credit, too.
- Fit form function conversations
- Quoting processes
- New product designs
- Prototyping and modeling
- Flat blank layout designs
- Tool design and building processes
- Proof of concept processes
- Custom production line set-up
- Trial production run procedures
- Custom manufacturing quality approval processes
- Custom packaging design
One of the keys to understanding what qualifies comes down to whether or not the activity is intended to develop or improve a product or process. Securing the R&D tax credit then depends on your ability to produce documentation supporting that claim. For a better gauge of what qualifies, use the Four-Part Test.
Additional Expenses
There are three main expense categories that will meet the IRS's criteria. They are:
- Research wage expense – This includes all taxable wages paid to employees including bonuses and stock option redemptions.
- Research supply expenses – Includes any supplies consumed while carrying out qualified research activities.
- Research contract expenses – The IRS defines a "contract expense" as only 65% of the total wages paid to contracted employees.
For these expense categories, you will have to provide documentation that the expenses were incurred as a direct result of "qualified activities" performed by your personnel. This means you have to keep track of the exact amount of time spent on qualified activities versus time spent handling the rest of their job requirements.
Maximizing R&D Tax Credits
Getting the largest possible R&D tax credit for your manufacturing client will likely require a partnership with an experienced R&D tax credit provider. From ideation to the finished product, manufacturing involves a litany of activities and expenses that typically qualify for R&D tax credits. But without deep R&D experience as well as a thorough understanding of manufacturing processes many of the qualifying expenses may be overlooked - And that could impact your clients opportunity to reinvest the credit back into their business to be more competitive, grow faster and make more money.
