Approximately eight out of 10 manufacturing firms and machine shops across the nation are missing out on hundreds of thousands of dollars in manufacturing credits every year. Companies often overlook this substantial manufacturer’s cash-back incentive known as the R&D Tax Credit for several reasons including:

1. A misconceived definition of R&D
2. Lack of technical engineering expertise by CPAs
3. Manufacturers don’t think their day-to-day activities qualify as “R&D.”

So what is the IRS’s definition of R&D?
Research and Development is generally understood by its literal meaning; research facilities occupied by scientists experimenting with various chemicals. By this traditional definition, a manufacturer would not have any qualified activities. However, that is not the definition as adopted by the IRS. The IRS defines Research and Development simply as the design or development of a new or improved product or process. Qualifying activities taking place on a day-to-day basis may include:

• Precision CNC Machining
• CAD/CAM
• Grinding
• Electro-Mechanics
• Prototyping
• Solvent and Adhesive Bonding
• Thermoforming Process
• Quality Assurance
• And much more.

This clearly includes manufacturing firms and machine shops as one of several industries partaking in R&D on a daily basis, whether they realize it or not.

So exactly how much are these companies really missing out on?
The R&D tax credit is one of the largest credits available. It is a 20 percent cash-back, wage-based credit. The IRS also allows companies to go back three open tax years and claim the credits for these previous years.

The best way to illustrate how a company might apply this credit is by detailing an actual case study. A Michigan manufacturer performed the following qualified activities between tax years 2003-2006:

• Precision CNC Machining
• CAD/CAM
• Grinding
• Electro-Mechanics
• Prototyping

Their total payroll for tax years 2003 thru 2006 was $4 million, or approximately $1 million per year. After completing the study, this company had a net R&D benefit of $110,000.

If this credit is so beneficial to machine shops, could more CPAs be using it?
Even though it’s a tax credit program, most CPAs recognize that to accurately calculate and substantiate the credit calculations, a highly detailed engineering report explaining a company’s qualifying activities must also be prepared.

“To truly take advantage of and maximize the credit, it takes specialists in this area of the Tax Code that also have the engineering expertise to fully understand each company’s products and processes, “ explained Saqib Dhanani of CORE Solutions Group, Troy Michigan.

The Michigan R&D Tax Credit Program
Currently, more than 33 states, including Michigan, provide an R&D tax credit benefit to companies conducting qualified activities including the State of Michigan. This is significant because the State of Michigan is second only to California in the performance and practice of R&D.

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