Don't Leave RD Money On The Table
But on further examination, virtually every job the company does is an R&D exercise. And the same could be said for most toolmakers. By the federal government’s definition, most manufacturers are intricately involved in R&D, and many of them are leaving thousands — if not millions — of dollars in federal R&D tax credits on the table.
“We had never even really considered it,” said STM Tooling President Roger Blauwkamp. “I think there are a lot of shops out there that don’t think it applies to them.”
Blauwkamp was first introduced to the tax credit at a National Tooling and Machining Association presentation last year. At the time, most of the discussion in his industry was centered on the state’s controversial tax-free Tool & Die Recovery Zones. Little attention was given to a rewrite of the federal R&D tax credit to include not only toolmakers, but practically every manufacturer.
Good for up to a 20 percent credit for new activities, the incentive brought the roughly $5 million company an average of $50,000 directly off its last tax bill retroactively for each year since 2001.
“It’s taken a few years for everyone to realize that there was a change, and a few audits for accountants to see what the IRS is looking for,” said Amy Forester, an R&D credit specialist in the West Michigan office of accounting firm Plante Moran.
In 2003, the IRS removed what had been commonly known as “the discovery test,” a rule defining R&D as discovering information new to those in the field. Under that rule, only companies forwarding true innovation and invention would qualify.
“The relaxed rules say that it doesn’t have to be new to the planet,” Forester said. “It just has to be new to the company.”
As such, the R&D credit is no longer limited to high-technology firms; it now qualifies small stamping firms, tool and die shops, injection mold companies, Tier 3 automotive suppliers and many others that wouldn’t classify themselves as R&D companies.
“Most anything that makes anything,” Forester said.
Jason Marvin, also of Plante Moran, has found that the credit today applies to any activities focused on process improvements. Lean initiatives, for instance, are applicable.
“When I’m talking to manufacturing companies, the people that are successful and still making money are reinventing the way they do things,” he said. “If you are spending capital money to do things differently, to be more competitive globally, this is the tax credit for that.”
The credit does not generally apply to equipment purchases.
In addition to the perception that small manufacturers are not R&D driven, Forester believes that many companies have not yet used the credit because their accounting firms are not aware they can. The rather sophisticated service is outside of the scope of many smaller tax services, she said.
While it is likely to be renewed by the end of the year, the credit did expire last year. According to the Associated Press, both Republicans and Democrats support the credit, but a proposal to reinstate it until 2007 and make it retroactive for this year has been delayed in Congress.
It is the largest of a list of popular tax breaks that expired this year, including deductions for college tuition and state and local income taxes, as well as incentives for businesses to hire welfare recipients and other hard-to-place job seekers.
The initial proposal to reinstate the credit was attached to a bill to cut estate taxes and voted down by Senate Democrats.