Too many plastics manufacturing companies leave money on the table by not taking advantage of the federal research and development tax credit, say tax experts.
And they say the R&D credit is available for a fairly wide range of process-improvement projects — not just earth-shattering breakthroughs.
“You don't have to practice Swedish for the Nobel Prize to get your R&D credit. It's meant to be broadly available,” said Dean Zerbe, managing director of AlliantGroup, a Houston-based tax services provider. “It's baby steps. It's evolutionary. It's not the eureka moment.”
His colleague, Javier Huertas, agreed. “It doesn't have to be completely new or that you have to be using a completely revolutionary technology, or type of resin that's never been used before. You just have to be basically trying to survive, essentially. What I mean by that is, a lot of business is going overseas and a lot companies that are successful are the ones that are constantly improving, making their manufacturing processes more efficient, reducing waste, or coming with a process that is not cookie-cutter,” said Huertas, who heads the chemicals and plastics group
The Washington-based Society of the Plastics Industry Inc. held a webinar earlier this year to explain the R&D tax credit that included Zerbe, Huertas and two people from Black Line Group in Minneapolis: principal Scott Schmidt and Liz Deimel, R&D tax credit director.
The R&D tax credit has been around for nearly 30 years. But it has expired and then later been extended 14 times by Congress. That adds to the confusion.
Last December, Congress approved, and President Obama signed, legislation that extended the tax credit for 2011 and made it retroactive to Jan. 1, 2010. Many states also have R&D credits as well.
The experts said a lot of manufacturers think the credit applies only to pilot-scale work. Schmidt said that's not true: “People tend to think that R&D only takes place in a lab where you have a scientist mixing chemicals in a beaker. But for tax purposes, it's much broader than that.” Think mold design, cycle-time reduction, testing of impact modifiers.
The government's goal in offering the credit — a dollar-for-dollar reduction off your tax bill, for work done in the U.S. — is to encourage investment, hiring, new technology and automation to help U.S. manufacturers compete in the global economy.
According to Schmidt, $7 billion in R&D tax credits are taken each year in the United States. Most of that goes to Fortune 500 corporations that hire the Big Four public accounting firms. “There's many small and midsized businesses out there still not taking advantage of the R&D tax credit,” Schmidt said.
Zerbe, who is the former senior counsel and tax counsel for the U.S. Senate Finance Committee, said only about 20 percent of eligible small and medium-sized firms take advantage of the credit. But for these smaller companies, the credit is one of the best ways to reduce taxes, he said.
It's important to properly document the R&D, track costs and keep complete records, the tax authorities said. You don't have to have a former research and development department. “But there's many, many people that are touching the R&D process,” Schmidt said.
Deimel said there are three main costs in R&D:
* The wages of the people involved, including direct engineering, support help and supervisors.
* Costs of supplies and materials used, which must be used solely for the R&D — these cannot be sold commercially.
* The price of external labor, such as outside engineering firms.
To qualify for the credit, she said, you have to figure the percentage of time each person involved has spent on the project, and calculate the specific amount of wages, to properly qualify those expenses.
Deimel said a project must meet a four-part test. First, it must be a new or improved product or process, which includes work to improve function, reliability and quality, or reduce costs. “Your activities do not need to be revolutionary, just evolutionary,” she said. Second, the innovation has to be something new to your company, even if you use commercially available technology. Third, spell out how you eliminated the “unknowns and uncertainties.” Finally, you need to rely on hard science, on technological innovation.
The final tax credit is a percentage of the total qualified expense.
According to tax experts, the dreaded Alternative Minimum Tax used to be a roadblock for S corporations and partnerships that pass through corporate income to shareholders for federal tax purposes, so it did not make sense to try for the R&D tax credit. But the Small Business Jobs Act of 2010, aimed at companies with less than $50 million in sales, can offset some of the AMT liability for the 2010 tax year, they said.