While waiting for the credit freeze to thaw—retrieve tens of thousands, or even hundreds of thousands, in cash back from the IRS using an underutilized tax credit.
There’s no secret that the lack of credit for businesses is hurting our economy and the unemployment situation. For example, Parker-Hannifin Corp. said in The Wall Street Journal that it boasts an untapped credit line of $1.5 billion. However, CFO Timothy Pistell says the inability of Parker’s customers to get loans has contributed to a collapse in demand for its hydraulic equipment. Their equipment is used on everything from bulldozers to airplanes.
Many companies will just have to wait until the banks begin lending again. However, some companies may have an opportunity for a cash windfall to temporarily get them past the credit freeze.
Put Cash in the Bank
What if you could get cash back with interest from the IRS within 120 days—would that help? What if that extra cash back ranged from tens of thousands to hundreds of thousands of dollars? Would that extra cash give you the opportunity to make an investment in equipment or expansion? Or could you use the extra cash for other purposes to help your company?
How is this possible? Most manufacturing firms are missing out on five-, six- or seven-figure manufacturing credits. The existing R&D tax credit is often overlooked because most manufacturers do not understand that their everyday activities already qualify for the credits.
And in most cases, your CPA doesn’t understand either, because it requires very specialized knowledge, and that’s why they have never approached you. It takes a team of specialized tax engineers and intellectual property attorneys to understand which activities qualify and to create the documentation to substantiate those qualifying activities.
Definitions of R&D
Most people we speak with conjure up the traditional definition of R&D—people in lab coats tinkering with chemicals, ultra-high-tech industries and Fortune 500-type companies. But the definition that was adopted by the IRS in 2001 is substantially broader, and the changes were so major that they virtually encompass every manufacturing or technology company in some form or fashion.
That is because, on a day-to-day basis, manufacturing companies across the country are designing new products and processes. If not, they are improving existing products or making improvements to the existing processes by which they make those products. Most of them do not have R&D departments, and they’re not doing this with the thought that they are performing R&D. They are doing it just to stay competitive in their respective industries. And again, that is the type of activity that the government is seeking to reward with the R&D tax credit.
Here are some of the everyday activities that would qualify for the credit:
- Designing the process to fabricate metal to reduce shrinkage and increase quality
- Programming CNC machines
- 3D CAD engineering with programs like SolidWorks
- Developing and testing prototypes
- Quality assurance—first-piece quality inspections
- Designing and developing specialty tooling and fixtures
- Considering alternative metals to develop the product
- Considering different metal thicknesses
- Developing engineering drawings
- Developing weld procedures
- Bending metal (e.g. sheet metal)—have to consider the stressing and stretching
- Considering strength of final product for application (meets specifications).
The R&D tax credit is a wage-based credit, and if you take into account that all of the above activities qualify and that supporting and supervising activities may also qualify, the credit can be substantial.
Should My Company Take a Look?
By the very nature of the business, small manufacturers such as fabrication and metalworking firms have qualifying activities. The question is: Can you actually use them?
To help, if you can answer yes to all of the following items, you definitely need to have an R&D tax consulting firm provide you with a free estimate of your tax credits.
- Were you profitable in 2006, 2007, 2008 and/or 2009?
- Is the average annual payroll for 2006, 2007 and 2008 in excess of $2.5 million?
- Is the company structure a C Corp? If so, you are okay. If an S Corp or partnership, do you have five or fewer shareholders? If so, you are okay.
If you answered yes to those three items, you have an excellent possibility of having a high five-figure credit, and into the six- or seven-figure credits for companies with larger payrolls. As mentioned before, the R&D tax credit is a wage-based credit, so the higher your total wages, the higher your credits. Think about what your company can do with the extra cash in about 120 days.
In summary, the current credit crunch is hurting companies that are trying to expand. You can decide to wait until the banks begin lending again or you can choose to take advantage of an existing tax credit to bring in needed cash fairly quickly. Even if credit becomes more readily available, you should still look into this great tax incentive because you’ll be getting money back from the IRS that you have been overpaying in taxes the last three years, and will continue to overpay going forward as well.
Seek out an R&D tax consulting firm to determine if you qualify and to give you an estimate of your R&D tax credits. The sooner you do this, the sooner you’ll have additional funds to invest in your company. iBi
About the Authors: Zee Makhani is a senior engineering director and
Mark Lauber is vice president of marketing for Paradigm Partners, a national tax consulting firm specializing in niche tax services such as the R&D tax credit, the IC-DISC (U.S. Exporters’ Tax Incentive), WOTC (Federal and State Hiring Tax Incentives), Section 179 and cost segregation.