Research & Development Tax Credit for the Contract Manufacturing Industry
Each year, the rights transfer process causes countless contract manufacturers to overlook the capital-infusing benefits offered from the research and development tax credit. Yes, customers typically assume ownership of products and/or parts at the end of the project engagement, which negates a manufacturer’s program eligibility. However, product development isn’t the only significant driver of R&D tax credits. Many contract manufacturing firms can also claim process development as a qualifying activity as well.
How Process Development Drives R&D Tax Credits
Bringing any product/part from concept to commercialization requires multiple iterations of property, plant, and equipment as well as countless process engineering phases. Experimenting on the manufacturing floor to create a better product or modifying the manufacturing process to reduce costs are just two examples that define congressional intent with this lucrative, government-backed incentive.
As a result, even if the product rights do eventually transfer, how the component is manufactured doesn’t transfer and may be considered an eligible operation. To qualify, you simply have to be developing new or improved products or processes. Most importantly, your development must be U.S. based to monetize your development activities in the form of tax credits.
Contract Manufacturing Qualified Activities May Include:
- Innovating product development using computer-aided design tools
- Developing second-generation or improved products
- Tooling and equipment fixture design and development
- Designing innovative manufacturing equipment
- Evaluating and determining the most efficient flow of material
- Designing, constructing, and testing product prototypes
- Increasing manufacturing capabilities and production capacities
- Developing new applications
- Improving product quality
- Optimizing manufacturing processes
Let’s say you spent the following costs in your development:
Your Federal R&D tax credit would be: $55,000
Best of all, the federal R&D tax legislation allows businesses to go back and amend up to 3 open years. Most states also offer this 3-year amendment incentive (with some states offering 4-year amendments), allowing taxpayers to double their final benefit.
Acena, a specialist in the R&D law, bridges the gap between the qualified activities and the associated costs.