Reinvesting in Manufacturing Innovation With R&D Tax Credits
By Sam Eartly, Supervisor, Tax & Business Services
Innovation is the driving force of the manufacturing industry. Given the current environment of increasing competition, global inclusion and mounting disruptors, finding the extra capital necessary to continuously reinvest into your business is imperative.
One relatively straightforward way to do this is to take advantage of the Research and Development (R&D) tax credit, a dollar-for-dollar tax credit that may be applied against taxes for the generating business. However, less than one-third of eligible companies realize they qualify for the R&D tax credit. For federal purposes, the R&D credit allows qualifying taxpayers to receive up to 14% of qualified research expenditures (QREs), such as in-house research expenses and contract research expenses. QREs can come from a wide variety of expenses but generally will include wages paid to qualifying employees and associated expenses used to develop a new product or process. Examples of manufacturing activities that may qualify include:
- Designing manufacturing equipment
- Optimizing manufacturing processes
- Designing and developing tooling and equipment
- Designing and testing prototypes
In addition to federal R&D credits, more than 30 states offer some version of an R&D credit. Planning accordingly can allow your business to reap twice the rewards on an investment you’re already making. Most states offer credits ranging from 2% to 6%, potentially allowing your business to return 6% to 14% of your original investment.
In Ohio, the R&D credit is a credit against the Ohio Commercial Activity Tax (CAT), but the R&D credit cannot reduce the CAT liability below the minimum fee. Any unused credit can be carried forward for seven years. R&D credits can be tricky and require careful planning. For example, Ohio is taking a more aggressive approach in auditing the R&D credit. This doesn’t mean you should not take advantage of the credit—you just need to make sure you have all the proper documents in place to secure the credit.
Just think, only one out of every 20 eligible businesses take advantage of the R&D tax credit. Marcum can work with manufacturers to successfully apply for federal and state R&D tax credits. Our ultimate goal as business advisors is to help you reinvest these savings into your business, continuing the cycle of growth and savings.
An R&D tax credit survey can help determine which of your manufacturing activities qualify. For more information, or to receive a free assessment, please contact Sam Eartly at [email protected] or call 330.564.8553.