R&D Tax Credit: Uncovering R&D Expenses in Foundry and Metal Casting
At a large foundry, the focus is often on profitability – how many tons you are pouring per day and how you plan to add capacity. Small-jobbing foundries, on the other hand, rarely have the financial strength or desire to reinvest in the equipment necessary to modernize. Yet both types of foundries could be eligible for R&D Tax Credits – a new source of funding to reinvest back into the business. How? By looking at some of the common activities in a foundry or metal casting business that often qualify as research and development.
Uncovering R&D In Your Foundry
You can't spell foundry without R&D, and you'd be surprised how many activities most foundries think of as "just part of doing business" typically qualify as R&D in the eyes of the IRS.
"Whether you are a small shop with $10 million in revenue or a very large, multi-billion-dollar foundry, you likely have activities that would qualify for the R&D Tax Credit," says John Madsen, Vice President and Manufacturing Practice Leader at Black Line Group. He spent more than 40 years in the world of contract manufacturing and can help identify the qualifying activities that often go unclaimed.
John generally finds hidden R&D expenses by examining nine stages of production at most manufacturing businesses, and he says metal casting is no exception. Here are some of the qualifying activities he expects to see in a typical foundry.
Sales Time and Design Meetings
"Often, qualifying R&D Tax Credit activities start with the sales team," he says. "When they have those first conversations with the customer to understand the parameters desired by the end-user, that's all research."
Based on the complexity of the design or tolerances desired, the sales team (often with support from the engineering team) will begin to make fit, form, and function suggestions to make the casting easier to produce and more cost-effective at the foundry.
Once the basic collaboration on design is completed, a cost estimator reviews the print or file. Among many details, they decide the most efficient way to run the project and develop a costing model. Numerous areas must be considered during the pricing phase – activities that could all be considered research and development in an R&D Tax Credit study.
When Considering How to Design the Mold
Along with the design, the team may also look at the size of the riser and gating to provide a reservoir of molten metal necessary to compensate for losses due to shrinkage as the metal solidifies. They would add material in areas requiring secondary machining.
Based on the complexity of the design, they would decide if metal inserts or spacers may be used in molds to provide core support during the casting process and calculate the amount of raw metal introduced into the furnace. They would price the time needed to make the core and remove gates, sprues, runners, and risers – and grind any parting lines.
"They would also calculate how the customer would be compensated in the quote for the weight of gates, sprues, runners and risers, and scrapped castings returned to the furnace for remelting," John adds.
Once all the basic factors are considered and accounted for, the quote is then sent to the customer. Remember, the common day-to-day activities identified for the sales team and estimating team are most often qualifying activities for the R&D Tax Credit on new jobs and revisions.
"Even if you go through the process and are not awarded the contract, the activity would likely still qualify," John says.
Engineering Process and Proof of Concept
Once the order is placed, the engineering team takes over the project to implement the process on the shop floor. This team looks at additional details not needed in the quoting process and shares them with the mold design team. For example, they may identify the proper draft needed on the vertical sides of a pattern or core box. Will ejector pins be needed and venting to reduce the trapping of gas in the molten metal during the pouring of the casting? Are binders needed in the sand to reduce inclusions or metal inserts needed to equalize the rate of solidification throughout the casting? The time spent engineering and designing the process, mold, and designs of a new or revised process are includable.
It's also important to understand that revisions and improvements to existing projects may qualify for the R&D Tax Credit. "One of the qualifiers of the law's Four-Part Test is to identify when your team is intending to develop or improve a product or process," John notes. "This could include the development of another process that reduces scrap rates, improves quality, reduces porosity and ultimately reduces cost."
Trial Production Run and Quality Approval
Once the molds and patterns are made, and the project is ready to hit the shop floor for the trial production run. All the time spent designing and engineering along with the time spent building the pattern and mold for new projects likely qualify for the R&D Tax Credit.
Additional activities that would likely qualify include…
- Time spent setting up the first pour
- Time spent inspecting the parts
- Time spent qualifying that a good part was produced
"The time QA spends sampling the first run and documenting the PPAP or FA is also part of the approval process," John notes, "and that could also be part of an R&D claim."
Shipping and Packaging
Last, but not least, is the packaging of the final part. Based on the size and weight of the casting, special skids or shipping containers are often designed to support the unique shape and prevent damage in shipping. This could include shipping to a supplier for machining or to the end customer. The design and manufacture of a special container can also be considered in the R&D tax credit.
The Four-Part Test
Once you’ve identified potential qualifying activities, run them through the Four-Part Test to verify. All parts of the test must be met in order to qualify. The four parts of the test are:
- Permitted Purpose. This is the activity intended to make or improve either a product or process that results in improved function, performance, reliability, quality or cost-efficiency.
- Technical Uncertainty. This is the activity intended to eliminate technical uncertainty when developing or improving a product or process related to methodology, design, techniques, formulas or inventions.
- Process of Experimentation. This is the activity that includes a process of experimentation to eliminate or resolve technical uncertainty. During the process, various alternatives and approaches are evaluated by modeling, simulation, trial and error, prototyping and other methods.
- Technological in Nature. The process of experimentation must rely on the hard sciences (engineering, physics, biology, chemistry, computer science).
NOTE: It's important to remember that if you are designing your own project or are given CAD files or prints from your customer, all projects must be manufactured in accordance with the information specified by the original design engineer. Understanding those requirements and all areas of the manufacturing process can still be considered research and development.
Now that many of the often-hidden R&D expenses have been identified, it’s time to work with the experts to recognize exactly what activities qualify for your business and the tax credit and help you qualify your process so you can reinvest back into your business.