R&D tax credits and toolmaking

BusinessWeek's SmallBiz magazine recently had a good story about a Pennsylvania toolmaker battling the IRS over research and development tax credits.

The story focuses on Tech Molded Plastics Inc. in Meadville, but it must apply to many other U.S. molders and toolmakers. Plastics News had a story as recently as 2007 touting the availability of the tax credits.

According to SmallBiz, Tech Molded, on the advice of its CPA, filed for $89,078 in tax refunds, claiming that the company "had spent that money developing molds for customers who used them to create complex plastic parts."

But the IRS ended up auditing the company, and then denying the claims. Why? IRS would not discuss the case, but the story quotes experts who say that the agency believes that small companies often do not include enough information to support their claims.

In fact, according to IRS, many small firms have filed prepackaged tax claims that lacked "concrete documentation of hours spent or costs incurred," according to the story.

In most cases, after the IRS denies an R&D tax credit to a small company, that's the end of the story.

But Tech Molded decided fight back.

"Right is right, and wrong is wrong. If we were to roll over every time we hit adversity, we wouldn't last long," Tech Molded President Mark Hanaway told SmallBiz.

The company's accountant estimates his firm has spent 500 hours defending Tech Molded's claim, and the Hanaway family has spent as much money defending the credits as they got for claiming them in the first place.

We don't know yet how this will turn out. Common sense tells us that Tech Molded is probably right. Congress passed the R&D tax credit -- in part, at least -- to help small manufacturers.

For now, neither side is backing down. Other toolmakers and plastics processors that have taken the R&D tax credit should be keeping an eye on this case.