More Manufacturers May Use R&D Credits Under Pending Legislation
By Chai Hoang and Joseph Eliya
Designed to encourage investment in innovation, R&D tax credits can sometimes be overlooked as fabricated metals products manufacturers, when in fact they are accessible to many small- and medium-sized manufacturers in the sector. It’s important to note that a company need not necessarily be producing an end product to qualify. Often, fabricated metals producers are engaging in projects aimed at implementing design, manufacturing or process improvement at the parts level. While many may not feel that such projects fall under the scope of R&D, many of the investments in improvement made by fabricated metals manufacturers to stay competitive in fact qualify as R&D from the government’s perspective. The following excerpt from a recent Global Trade article authored by our colleagues Chai Hoang and Joseph Eliya explores proposed legislation that could extend these tax credits and benefit manufacturers in the fabricated metals sector.
With the recent tax-extenders vote from the U.S. Senate Finance Committee, manufacturers are anticipating the extension of various tax items that have proven beneficial to the industry in the past. The legislation would extend the research and development tax credit (a.k.a. R&D tax credit or research credit) and other tax relief items through 2016, providing manufacturers greater certainty around tax planning and their expected tax liability.
The tax-extenders bill is legislation that temporarily extends expiring provisions of the tax code.
The R&D Tax Credit is particularly important to manufacturers, as many manufacturing companies are likely performing qualified research activities and thus could benefit from the credit. As recent IRS data illustrates, in 2012 manufacturing represented over 60 percent of the research credits claimed across the economy.
Under previous legislation the research credit could be applied only to income taxes, but an important innovation in the current bill permits small businesses to claim the credit against their payroll taxes.
Many startups and smaller businesses pay minimal or even zero income taxes but do, however, typically owe payroll taxes. Thus, since the extenders package allows small businesses to claim the research credit against their payroll taxes, smaller manufacturers may find a greater incentive to claim the research credit as a way to offset some or possibly all of their payroll taxes.
Further, the tax-extenders package contains a provision that allows companies to claim the tax credit against their alternative minimum tax, making the credit available to another set of manufacturing companies that may have previously been unable to take advantage of the credit.
The extenders package is especially important for small and startup manufacturers, but companies of all sizes may benefit from the passage of the bill. If the package is enacted, manufacturers that use the tax credit will benefit from increased earnings per share and cash flow and a reduced effective tax rate.
As of this writing, the bill is with the House of Representatives, which will consider the bill as is or introduce its own legislation. Since enacted in 1981, the R&D Tax Credit has been extended more than 15 times, retroactively or otherwise. Small, medium and large manufacturers alike should take note of the proposed changes to the research credit and determine how the provisions could benefit them.
This article was reprinted from Global Trade magazine with permission. Original article may be viewed here.
Chai Hoang is a senior associate with BDO’s R&D Tax Services practice for the Northeast U.S. region, and may be reached at choang@bdo.com.
Joseph Eliya is an associate with BDO’s R&D Tax Services practice for the Midwestern U.S. region, and may be reached at jeliya@bdo.com.
This article originally appeared in BDO USA, LLP's Manufacturing Output newsletter with permission (Fall 2015). Copyright © 2015 BDO USA, LLP. All rights reserved. www.bdo.com