As some plastics injection molders seek to wring every last dollar out of operations during these trying economic times, they may be overlooking a significant source of revenue that can help them hire more workers and expand operations: the research and development tax credit.
Big firms have banked on these credits for years, but they also were intended to fuel innovation and hiring in an area that produces the most U.S. jobs: small and midsized companies.
In the last few years, Congress has modified documentation and qualification requirements to expand the credit's use by companies outside the Fortune 1000. Court rulings have also boosted eligibility and provided clarification.
Just last year, five major R&D tax credit court cases added guidance in that area. One case, in particular, involving auto supplier TG Missouri Corp. of Perryville, Mo., had broad implications for the plastics industry. In that case, the court ruled that a company could capture supply expenses incurred for the development of tooling and dies that were sold to the client.
By applying law and guidance, one firm incurring on average $500,000-$700,000 in qualified tooling and mold costs that it was not claiming increased its tax savings by $35,000-45,000 in 2010 alone.
If a firm has invested time, money and resources toward advancing and improving designs and processes, it may qualify. Tooling, raw-material costs for testing new or improved processes, engineering and labor costs all may qualify.
Potentially hundreds of thousands of dollars are at stake, as firms with qualifying activities are entitled to a 20 percent R&D tax credit, subject to certain limitations for previous years. More powerful than a standard deduction, it offsets taxes owed or paid, dollar for dollar, as opposed to just reducing taxable income.
Further, a business can obtain the credit for all open tax years — generally the last three or four years plus the current year. It can also carry them forward 20 years.
For example, a company with about $10 million in sales was manufacturing, to stringent specifications, small plastic medical-device components. After the firm validated tooling and molding, it sold them to customers while continuing to use them to manufacture the products. In determining its R&D expense, the firm did not include any of these expenses, though they represented on average $700,000. In the end, it was able to claim them for a federal and state R&D tax credit of about $350,000 for 2007-10, which it used to invest in equipment and employees.
While determining what qualifies for the research tax credit is somewhat complex, it starts with careful tax analysis and ends with documentation and filing amended returns. It can also be a brand-new source of valuable funds.
Huertas, an alliantgroup associate director, and White, an associate, are part of the Houston-based tax services firm's plastics industry specialization program.