by Michael S. Neubauer, CPA, CVA, MBA
McGill, Power, Bell & Associates, LLP
The COVID-19 global pandemic has changed the world in a countless number of ways. For many in the manufacturing sector, there has been a change in demand, leading to a fresh look at operations. This often leads to manufacture products they haven’t offered previously. Due to various economic influences, many have found themselves in the position where orders for current product offerings have slowed down, been deferred, or cancelled altogether. This is happening at the same time that the demand for equipment needed by healthcare providers, including personal protective equipment and ventilators, is at an all-time high. This has led some manufacturers to significantly alter their operations to offer products such as these, or perhaps new product lines to a new group of customers that weren’t being served before.
Manufacturing products that a company hasn’t previously produced presents a number of challenges, as design and the required technology must be assessed in order to successfully produce new products. In most cases, this will be an iterative process that will either lead to a finished product or an abandoned project. Regardless, the risk involved with taking on new initiatives such as this presents an opportunity to take advantage of the R&D tax credits.
Another example of an activity that could qualify for R&D tax credits is a modification of the manufacturing process in order to meet new customer specifications. COVID-19 has led many companies to re-evaluate their needs and the requirements that they place on the products that they order. When this situation arises, a manufacturer has to revisit their manufacturing process and incur time and expense while working through the solution. These activities, which are frequent in today’s world, can also qualify for the R&D tax credits.
The R&D tax credits have evolved over recent years, resulting in a much more inclusive credit that also has benefits that are more realizable than they were previously. Prior laws required that activities qualifying for the R&D tax credits needed to be such that capability, method, and design all had to be uncertain. Additionally, there was a discovery test which required knowledge that exceeded that of other professionals in the field (typically patentable knowledge). These requirements have been modified so that only one of these items (capability, method, or design) is required to be uncertain, and the discovery test was eliminated.
When a company engages in a project or job that qualifies for the R&D tax credit, wages, materials / supplies, and outside services used in activities prior to the point of commercial production will qualify for purposes of computing the credit. This includes, but is not limited to, the time and materials related to production costs, as well as testing and modification of custom tools, dies, molds, production construction costs, and payments to suppliers.
Today’s world has seen unprecedented challenges to manufacturing companies, including but not limited to employees, customers, and overall economic change. While there are numerous opportunities to benefit from programs put in place via the CARES Act, the R&D Tax Credit is an opportunity that should not go unnoticed. The R&D Tax Credit is available at both the Federal and Pennsylvania State level and can be an excellent source of much-needed cash flow during these uncertain times. Now more than ever, it is critical that our manufacturers take advantage of every opportunity available to work through the current landscape.
Side Note: For additional insights on the R&D Tax Credit, NWIRC will offer a no-cost webinar, R&D Tax Credit: Oppotunities in the Manufacturing Sector, on August 4 from 11:00am-12:00pm featuring a team from McGill, Power, Bell & Associates. Find more details at www.nwirc.org/events
