by Kevin Oviatt, McGill, Power, Bell & Associates

Spiral notebook with process businessBy now, I am sure you have heard of the Federal Research Credit and how it can benefit your business, especially if you create new or improved products. The Credit has been discussed at length during the latest rounds of new tax laws, including how the United States rewards its many innovative companies with tax incentives to combat global competition. The recently passed PATH Act (Protecting Americans from Tax Hikes Act of 2015) finally made the Credit a permanent fixture of the Internal Revenue Code.  If you couple the Credit with the other significant tax incentives for manufacturers, namely Section 179 (now permanent), the Section 199 manufacturer’s deduction and the temporary bonus depreciation, it’s easy to deduce that this may be the best taxing framework for capital intensive manufacturers that we have seen in a very long time, if not ever. Improving the tax laws for manufacturers has been a very important objective (albeit a slow progress) of lawmakers because of the inherent value of having manufacturing businesses and the stable job markets they create. That’s all well and good, but the question you need to ask yourself (or your accountant) is whether or not your business is taking full advantage of the tax incentives available.

If you previously looked into the Federal Research Credit and decided it was not for your business, I believe it is time to take a fresh look. One of the great myths is that the Credit is only for the large companies that create “brand new” products. The Credit is intended to incentivize businesses’ activities that undertake for the purpose of discovering information (research) that is intended to be useful in the development of a new or improved business component. The term ‘business component’ encompasses many different things, including product, technique, formula and, most importantly, process.

The inclusion of processes as a business component is very beneficial for all businesses, particularly in our region. Our region is rich with a diversified manufacturing base, including manufacturers who are principally custom/contract manufacturers, or job shops. In most instances, job shops are not the originators of a product’s design or purpose. However, job shops are often tasked with designing and developing a non-existent manufacturing process to bring products (or product components) to commercial production. Commercial production is a very important point in time for the Credit because the regulations state that all qualified activities can accrue related costs (more costs equal more Credit) up and to the point of commercialization; therefore, the qualified activities include not only the innovative design and creation of a new product, but also the development of the manufacturing process to bring that product to commercial production.

In addition, the regulations were re-written recently to remove the onerous “discovery test”, which required businesses to essentially prove that their new or improved business component was not already established in the marketplace; obviously a daunting task. Accordingly, with the removal of the “discovery test” rules, a business component (product or process) only has to be something not already developed by your business.

So, where does that leave us? If your business is often working on the development of manufacturing processes for products your business has never developed before, your business would most likely benefit greatly from the Credit.

Kevin Oviatt is a Partner at McGill, Power, Bell & Associates, LLP, joining the firm in 2004. He is a member of the firm’s Manufacturing Services, Research and Experimentation Tax Credit, and Business Valuation and Litigation Support Groups.