Let’s get one thing straight right from the beginning. So often we hear “we don't do R&D, we just make parts for our customers.” The manufacturer with this mindset just missed the foundational purpose of the R&D Tax Credit by not taking the time to understand the value. They missed the opportunity to reinvest the R&D Tax Credit back into the business to be more competitive, grow faster and increase profitability.
Remember, the R&D Tax Credit was created to incentivize innovation, which includes the development of new products and processes that happens regularly in plastic manufacturing.
We also realize that manufacturers fear the IRS and think if they take the credit, the IRS will audit and rain fire from the sky. Not true. "It is our job to explain and guide you through the process," says John Madsen, VP and Manufacturing Practice Leader. "We follow the tax law and if an activity is outside of the legal acceptance, we will tell you and not claim that activity in your R&D Tax Credit."
If you are intending to develop or improve a product or process for yourself or your customer, this is the beginning of the qualifying process even if your customer is paying for the mold and parts! The R&D activity is how you make the parts to satisfy the requirements specified on the print or CAD file. Often this activity starts with the sales team.
Based on the skill level and industry knowledge of your salespeople, often the early interactions with your potential customer can qualify. Taking a customer to lunch or standing in a show booth are not qualifying activities, but taking the time to understand the customer's project requirements and making suggestions can be a great place to start. Whether you are an injection molder, blow molder, rotational molder, compression molder, or are extruding product, each manufacturer and process have limitations.
Your salespeople need to understand the project requirements, including limitations, part size, tolerance, and materials used to continue the conversation or make a referral to a partnering company. Your salespeople would quickly lose credibility with the customer and the manufacturer by asking an injection molder to quote an agriculture fuel tank. That would be a referral to a rotational molder to help the customer and for the salesperson to gain credibility as a good resource for answers.
Qualifying activities include time spent in meetings, phone discussions and email exchanges related to gaining a sound understanding of the general requirements (fit, form, function) of the project. Remember, even if a current customer wants to discuss an ECN or revision changing an existing part, this still qualifies. In fact, even if they decide not to go forward with the changes, the time spent evaluating is still a qualifying activity!
Once a project has been identified, the project needs to be priced and the information gathered by the sales team is transferred to the estimating team. This team will begin to evaluate alternatives and reduce the uncertainty by investigating the raw material requested, quantity of parts, and tolerances that need to be held. Based on the requirements specified by the customer and the capabilities of the equipment to produce a tightly toleranced product in a repeatable process, a secondary machining operation may be added to hold the tolerance specified.
The estimators will evaluate a single or multi-cavity mold based on volume. They will look at project life and quoting aluminum molds if the materials are non-abrasive like ABS, polycarbonate, polypropylene, or the life of the project is under 150,000 parts. They need to understand if a hand load insert will be required, slowing the process and increasing the cost per part. This and many more things are considered when quoting the project.
When a large or risky opportunity is presented and the estimators have identified a good process, often the owner or a cross-functional team is assembled to evaluate the quote for any additional opportunity to reduce cost or risk. The time spent evaluating alternatives – regardless of whether you get the job or not – can also qualify.
Activities that do not qualify are simply updating existing quotes for raw material price changes with no modification to the original product.
As you know, one of the benefits of injection molding is the ease of creating parts with complex geometric shapes. The design team now reviews the quote and CAD files to reduce the chance of defects by designing the cavity and core along with the sprue, runner and gate to fill the mold with a consistent flow and consider the cosmetics of the part when placing ejectors. Rounding corners and creating the proper draft is critical to ejecting the part without damage.
Designing new molds to manufacture a product can also qualify for the R&D tax credit. In fact, time related to both the building and the trial of the tools could qualify as well.
The direct time spent by your employees and supplies used (not consumables) in the manufacture of the mold will also likely qualify. This will include time spent in design and redesign, milling, machining, grinding, polishing, assembly and trial.
Often the injection molded parts, except for trimming the runner, are ready to use. If the CTF (critical to function) features require components of the molded part to be held at a tighter tolerance than the process could consistently hold, adding secondary operations such as machining are added to the process.
The time spent evaluating the process or vendors for the first-time set-up will also likely qualify. As a manufacturer, you must also continually improve the process. Additional qualifying activities including improvements to quality, function, performance and cost reductions are likely assigned to the engineering team.
Trial production runs are essential for making sure products are manufactured to your customer’s requirements. The trials allow for inspections and reviews to determine not only if the product meets your customer’s requirements, but also whether your manufacturing processes are being executed efficiently.
Utilizing the CAD software system can help prevent design errors as it is important the manufacturer gets it right the first time. On the trial run, the team will be looking for warping, sinking weld lines or burn marks. It's essential all corrections are made, and equipment adjusted to the optimum setting before production begins.
Quality is the verification component of developing or improving any production process. Therefore, the time and expenses related to documenting or creating FA, ISIR, or PPAP reports for the customer are includable in your R&D Tax Credit.
When using a standard or stock corrugated container to ship product to your customer, you haven’t spent any qualifying R&D activities. However, if the product is unique and requires additional care to prevent damage in shipping and a box designer has been used to improve the packaging for cost, quality, or reliability, R&D qualifying activities have likely occurred.
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 implications of those activities. The R&D Tax Credit is a particularly complex and a frequently changing piece of the federal tax code, so it's best to work with a company that is knowledgeable on your industry and understands the R&D Tax Credit to ensure you’re receiving your fair share.
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