In the manufacturing industry, there are so many tax credits that are available to businesses: Research and Development Credit, Jobs Tax Credit, Work Opportunity Tax Credit, Fuel Tax Credit, and numerous state tax credits for investing in equipment and employee training, to name a few. However, many manufacturers are not taking advantage of the benefit they present.
Below, we’ve highlighted two tax credit opportunities where we notice many manufacturers have ‘left money on the table,’ so to speak. We attribute these oversights to old assumptions and misunderstood parameters and that can easily be rectified with the correct applications.
1. R&D Tax Credit: Easier to Attain than Many Assume
One of the biggest tax credits that manufacturers overlook or do not maximize is the Research and Development (R&D) tax credit. Yet, it is by far the most valuable credit that can be leveraged by manufacturing companies.
As the credit has been around for 40 years, I’ve talked to several individuals in management that believe the credit is not worth their time. There seem to be two consistent reasons as to why they are not taking advantage of the R&D credit today.
Changes to the Credit Have Extended Benefits to Businesses of All Sizes
The first reason stems from businesses looking into the benefit pre-PATH Act and seeing that the benefit wasn’t worth it. Pre-2016, it was hard for small- to medium-size companies to take advantage of this credit because it was limited by the Alternative Minimum Tax (AMT). However, due to the PATH Act enacted in 2015, the credit in tax years following December 31, 2015 is no longer limited by AMT. This was a huge change, as it presented the opportunity for companies big and small to take advantage of the tax credit.
Many businesses maintain the old mindset today because they haven’t been properly educated on the changes to the tax code, and how to apply them for their benefit.
Qualified Expense Parameters are Often Misunderstood
The second reason is due to hesitation created by the notion that ‘Research and Development’ needs to be performed in a lab by individuals in lab coats, or the result needs to demonstrate a major technological advancement. When in fact, that definition is far from the truth of what is acceptable.
As manufacturers are continually improving current products, expanding product lines, or just improving a process, research and development expenditures occur throughout. More manufacturers are moving to automation and utilizing robotics, and although the cost of the machinery and equipment is not qualified, there many other associated costs that can be qualified under R&D. For instance, the time spent setting up, the trial and error, test runs, etc. are all qualified R&D expenses.
Again, what constitutes a qualified expense doesn’t have to be revolutionary. Here’s an example:
- A company manufacturers metal castings. As they modify a casting by experimenting with different metals, adjusting the curing process, or adjusting the patterns and mold; all the time and materials spent on numerous trials and test runs to perfect that product are considered R&D. Everything the manufacturer does to its products to make them stronger, last longer, or lighter weight – processes that a metal casting company would do inherently to create better products and improve margins – are small changes that when multiplied over the course of the entire year can add up to a large tax credit benefit.
There are only four tests that need to be reached in order to be a qualified R&D expense:
- Elimination of Uncertainty: Your project’s efforts have sought to dismiss ambiguity associated with your project’s development or improvement and eliminate uncertainty.
- Process of Experimentation: Your company has explored multiple avenues to reach a certain goal, and you can prove that you utilized some type of experimentation to determine the best way to move forward in your innovation.
- Technological in Nature: Your project and methods for evaluating your success were based in the hard sciences, such as physics, engineering, computer science or chemistry.
- Qualified Purposes: You attempted to improve accuracy, speed, quality or another performance factor. According to the IRS, your project needs to be “intended to be useful in the development of a new or improved business component of the taxpayer.”
The best part about the R&D credit is that most states also offer this credit, meaning that there is the opportunity to get a federal and state tax credit to offset a companies or individuals (if pass-through) tax liabilities.
2. WOTC: Classifications Often Overlooked Due to Misunderstanding
Another underutilized tax credit that frequently gets overlooked is the Work Opportunity Tax Credit (WOTC). With 10 targeted classifications that an employee can fit under to be eligible to receive the credit, employers are often overlooking hiring from specified ‘Target Groups’ and missing out on benefits they could be receiving.
Expanded Hiring Practices
Here’s a scenario many manufacturers can relate to:
A manufacturing company needed a quick influx of employees due to increased demand of their product. The business is in a small town and its ability to hire workers was scarce. A nearby drug and alcohol rehabilitation facility was housing occupants that could serve as a source of workers. The arrangement was beneficial for both parties – the rehab process includes finding a job, and the manufacturing plant needed the extra help.
But the benefits for the company extended beyond filling employee gaps and enabled the business to qualify for the Work Opportunity Tax Credit. The WOTC encourages employers to hire employees that are faced with significant barriers to employment (an individual or family collecting government assistance, an unemployed or wounded vet that is receiving government aid, or an ex-felon). Through discussions with the client, we determined that several of the hired workers were ex-felons and would qualify for the WOTC.
Are You in a Designated Area?
The classification that is inherently missed, however, is typically the easiest to obtain: Hiring individuals from an Empowerment zone, Enterprise community, or Renewal community from where the company is located. We find that in many cases, the employer is unaware that they are in such designated area and thus don’t realize that the employees that they are hiring locally fit the classification. The most concentrated of these areas lie within the Midwest. Businesses can find where these areas are located on the Department of Labor’s website.
If your new employees fit within a Target Group, there is some additional paperwork that needs to be filed with the state workforce agency on the employee’s behalf, but the benefit can easily offset the cost of some additional paperwork. The credit amount can be up to $9,600 per each qualified new hire depending on the Target Group they are classified under. The credit is based on a percentage of wages and the only requirement is that the individual worked at least 120 hours. The credit is maximized when the employee exceeds 400 hours.
Wondering if you’ve maxed out your tax benefits? Contact K·Coe’s manufacturing-specialized tax advisors with questions about the applicability of available tax credits, or for an assessment of your business’ tax structure and strategy.