Case Study: R&D Tax Credits Propel Competitiveness in Contract Manufacturing

Succeeding in contract manufacturing requires unwavering precision and intricate problem-solving. Companies must continually innovate and refine their products while pushing the boundaries of their manufacturing capabilities.

The Challenge: Balancing Precision with Profitability

Contract manufacturers face the complex challenge of balancing the need for rigorous research and development (R&D) with the imperative of maintaining profitability. Designing and producing parts that meet extreme performance requirements necessitate significant financial investment.

Yet many contract manufacturing companies overlook a valuable resource: R&D tax credits. These incentives can significantly improve cash flow, reduce tax liability, and enable internal reinvestment in the R&D critical to operations.

This challenge was formidable for one of Acena Consulting's partners, a Tier 3 contract manufacturer for aerospace based in California. With an annual revenue of $10 million and more than 31 R&D-related employees, the company needed to optimize its R&D budget to potentiate growth. 

Our client relied on us to navigate the complexities of R&D tax credits, which can be claimed at the federal and state levels.

Acena’s Approach: Strategic R&D Tax Credit Optimization 

Acena completed a qualification assessment of R&D processes and projects, performed a quantitative analysis, and developed the documentation necessary to substantiate each claim.

During qualification, Acena scrutinized company activities to identify all project-associated expenses. This examination included a deep dive into all R&D projects, including those:

• Designing horizontal machine setups producing delicate struts to mitigate tool collision risks and chip management challenges.
• Developing novel clamshell coupling designs for aircraft, which required iterative prototyping and testing to maximize structural integrity.
• Engineering new manufacturing processes for aluminum parts – fabricated using Kitamura's Horizontal Machining Centers – to optimize tooling and reduce vibration. 
• Optimizing strut production processes on horizontal and vertical machines (e.g., via fixture design customization) to increase throughput and account for part variation.
• Refining manifold production processes on high-performance horizontal machines to create custom porting tools and fixtures, enhancing speed and part quality.

Acena’s diverse team of CPAs, engineers, and tax professionals was uniquely positioned to identify these expenditures and understand their connections to functional advancements, which expedited study completion to our partner’s benefit in both time and money.

The Impact: Reinvesting in Innovation and Growth

Beyond simply qualifying eligible activities, Acena provided a quantitative analysis that resulted in a substantial and defensible credit and developed the necessary documentation to support the claim. This meticulous approach ensured our partner could confidently claim the credits without undue trepidation of an audit.

The results of our engagement were significant.

• Qualified research expenditures (QREs) approximated $2.2 million.
• The federal R&D tax credit equaled $160,000.

Our partner secured substantial R&D tax credits, which translated directly into reduced tax liability and improved cash flow. These funds were strategically reinvested back into the business to advance R&D initiatives, fuel innovation, and enhance market competitiveness.

Key Takeaways

This case study underlines the importance of strategic tax planning for contract manufacturing companies.

• R&D tax credits strengthen market advantage. They provide crucial financial support for contract manufacturing companies, enabling them to compete with greater performance technologies while maintaining fiscal stability.
• Expert guidance is invaluable. Partnering with experienced R&D tax-credit specialists like Acena can maximize credit amounts, minimize risk, and streamline the entire process. Schedule a free consultation today to receive immediate assistance from Randy Eickhoff, CPA, Founder & Head Coach at Acena. We are here to support your success.

Stay Informed

Want to learn more about qualifying and documenting activities for R&D tax credits?

• Register for our free, monthly webinar, next on April 22: “Cracking the (Tax) Code for R&D: Audit Defense."
  • This workshop provides one CPE credit for professionals keeping up with continuing education.
  • Read our blog, "The Business’ Guide to Decoding the R&D Tax-Credit Audit."

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Edited by Rae Fox-Smoltz, BSBA, BSENRE, Project Manager at Acena Consulting. Photo courtesy of NASA Goddard Photo and Video on Flickr.