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R&D Credit Offers Manufacturers Money-Saving Opportunities

When many business owners hear about research and development (R&D), they often think of scientists in lab coats creating new chemicals. So it's no surprise that these business owners might believe the income tax credit for research expenditures does not apply to them.

The good news is that many employee and contractor expenses can qualify for the federal R&D credit.

Which activities might qualify?

Besides creating new chemicals, activities that might qualify for the R&D credit include, but are not limited to, the following activities—whether or not successful:

• Designing and testing a new assembly line process (or portion thereof)
• Developing new technology
• Creating prototypes or models of products
• Testing new material or chemical combinations in creating your inventory
• Developing new quality control processes
• Experimenting with new machinery in your manufacturing process

What about salaries and professional fees?

More good news: The salaries paid to scientists or engineers will often qualify for the R&D credit. The IRS allows a portion of other salaries and fees paid to those involved in allowed activities to qualify, including the following:

• Employee salaries
• Fees paid to independent contractors
• Support staff salaries
• Hands-on owner salaries

How to calculate the R&D credit

Congress allows you to adopt one of three methods of calculating the R&D credit. Three choices mean that each one should be computed to determine which one will give you the highest return.

The IRS also allows you to amend your returns for any years where the statute of limitations has not closed (generally three years back) to claim prior-year credits. 

The calculation goes beyond determining the maximum credit. Unfortunately, if you are paying or come close to paying the alternative minimum tax, your credit could be limited or denied for that year. The credit would not be lost, however, as it can be carried to another year.

Your Blackman Kallick representative can assist in these calculations. We can also help you document the time spent by each employee or contractor on the allowable activities to determine which method of calculating the credit generates the greatest benefit for you.  

Need help utilizing the R&D credit?
Contact Mike Calahan at 312-980-2996.

Our thanks to Alan Alport and Tom Franklin for their assistance in writing this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.