R&D Tax Credit: The Hidden R&D Expenses in Your Machine Shop
It takes a trained eye to truly understand everything going on in your machine shop on a daily basis. But even the most experienced machinist isn’t likely to see all of the money laying around the shop just waiting to be picked up via the Research and Development Tax Credit. It hides there in plain sight, and too often goes unnoticed and unclaimed.
Black Line Group VP and Manufacturing Practice Leader John Madsen wants to help you avoid making this mistake by identifying the research and development expenses hidden within your shop that are eligible for the R&D Tax Credit. They are common, standard parts of your production processes that actually qualify as research and development in the eyes of the IRS.
Uncovering R&D Activities in a Machine Shop
If you are a contract manufacturer working with new jobs or developing your own new product or process and using a saw, broading machine, drill press, gear shaper, hobbing, hone, lathe/turning, screw machines, or milling machines, you likely have processes that would qualify for the R&D Tax Credit – regardless if it’s machining plastic, wood, foam, composites, or metal. The process of uncovering the hidden expenses is similar, whether intending to improve a product or a process, and those R&D activities still apply to your shop even if your customer is paying for parts.
When uncovering R&D activities, John typically looks at some stages of the production process that are often taken for granted by the manufacturer because they are so common, but frequently qualify for the credit. Here are some of the areas he frequently finds R&D expenses in a machine shop.
Sales and Quoting
To price a project, salespeople and cost estimators must understand the unique part requirements – including the machinability of the raw material, quantity, size, and tolerance – along with your in-house capabilities.
“Every piece of equipment on your shop floor has unique limitations,” John says. “The accuracy of your equipment, understanding how to work within those constraints, and utilizing multi-access machines for the reduction in work handling is how you’ll assemble the most cost-effective quote for your customer.”
All of this can count as research, even if your customer will be paying for the parts or you’re making free prototypes as part of the process, your costs can still qualify. In fact, those activities even qualify if you aren't awarded the contract!
Design
As a contract manufacturer, you receive CAD files, 3D solid models, and even tried-and-true paper printouts depicting your potential customer’s manufacturing request. If you design the product, CAD designers convert the engineer’s information to create a solid model of the part(s) along with the necessary tech specs, including dimensions and geometries needed for production.
When designing a new part or programming tool paths for your shop, additional considerations include the properties of the material being machined, tooling and the order of tools used to create the desired shape – along with work holding capabilities. Machine capability may also restrict the design possibilities, limiting part thickness and diameter ranges, inclusion and complexity of internal cavities and features.
You may think of this as "just what we do," but the time spent by your team considering all of these factors are qualifying activities for the R&D Tax Credit.
Trial Production and Proof of Concept
Operators must prepare the CNC machine before running the program, a process that includes affixing the workpiece directly into the machine, onto machinery spindles, or into machine vises or similar devices, and attaching the required tooling – such as drill bits and end mills – to the proper components.
Dry running the program allows for identification of potential errors and fixing mistakes before a crash can occur – the kinds of research and development activities the R&D Tax Credit was created to reward. Common errors are motion mistakes, syntax errors with G codes, or simply a missing decimal point.
“I can remember the sick feeling I had when programing a machining center years ago,” John says. “I sent the program to the Monarch VMC and 15 minutes later I had the operator in my cube showing me a fly cutter self-welded to my material. After reading the G codes I found my mistake. I had planned on taking a .025 cut with the 4-inch diameter fly cutter but my program read .25. I left that welded fly cutter on my desk as a reminder for over a year to make sure I verified my programs.”
After a successful dry run, the machine can be prepared for operation. In addition to the dry-run process, the operator must consider what the tool will be machining. If required, the operator can adjust the tool offsets in the direction of leaving excess stock. Then it’s time to completely machine the workpiece per the CNC program.
To verify the program, the operator or a QA tech will measure what the tool has done. Additional adjustments may be needed to the offsets to ensure the machine is making parts to print. Based on the adjustment, a rerun of the tool/part may be required. Once the first part is produced the operator will again measure to confirm that the new offset values are correct.
As you've probably gathered by now, the set-up time for new products, time spent tweaking the program and operator(s) checking the first parts can all be included in the R&D Tax Credit.
Quality Approval
CNC machining requires attention to detail based on the type of tolerances being held. The CNC controls will follow the instructions given in the program. If the operator is programing the part at the machine, often if an error is made it will take a second set of eyes to catch the mistake. Tool wear can also play a factor in older equipment that is unable to self-correct. Having a documented procedure that includes quality approval from the QA lab in larger operations, or having a second operator in smaller shops verifying parts are to print is critical to producing consistent acceptable products. The time spent checking, verifying, and documenting with PPAPS, FA or ISIRs are all qualifying activities on new parts for the R&D Tax Credit.
Shipping and Package Design
Part requirements are much stricter and held to a tighter tolerance in the machining industry, which means the potential for damage to parts is more likely. Custom packaging, therefore, is often needed to prevent damage. The time spent designing custom packaging is also likely to qualify for the R&D Tax Credit.
Apply the Four-Part Test
No matter what parts of the process you identify, you must run them through the R&D Tax Credit's to determine whether they 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).
Maximizing the tax credits your organization can receive based on research and development requires analyzing many factors. Black Line Group can help because we know manufacturing and this complex law. We have staff members with more than 40 years of tooling and manufacturing experience that can explain the process in your terminology and help you document the process.
Reach out today to find out how we can help your business grow through the R&D Tax Credit.
