The R&D tax credit is a tax incentive encouraging companies to invest in research and development activities in the United States. The credit is available to businesses that engage in qualifying R&D activities, such as developing new products, processes or software, and improving existing products or processes.
For manufacturers in the United States, there have been several recent changes to the R&D tax credit:
- Permanent extension of the credit: The R&D tax credit has been permanently extended, which provides manufacturers with greater certainty and stability when planning their R&D activities.
- Expanded eligibility for small businesses: The Protecting Americans from Tax Hikes (PATH) Act of 2015 expanded the R&D tax credit to include certain small businesses that previously could not claim the credit due to their size or structure. This change benefits many small and medium-sized manufacturers.
- Alternative simplified credit (ASC): The ASC is a simplified method for calculating the R&D tax credit. The ASC allows businesses to claim a credit of up to 14% of their qualified research expenses.
- Payroll tax offset: Beginning in 2016, qualified small businesses (defined as those with less than $5 million in gross receipts and those in their first 5 years of existence) can elect to use the R&D tax credit to offset their payroll taxes (quarterly FICA taxes), which can provide a significant cash flow benefit. This is a significant change, as businesses no longer need to incur federal income tax liability to monetize the R&D tax credit.
- Elimination of the AMT limitation: The Alternative Minimum Tax (AMT) is a parallel tax system that applies to certain high-income taxpayers. Prior to the Tax Cuts and Jobs Act of 2017, the R&D tax credit was limited for AMT purposes, which reduced its value for some businesses. The Tax Cuts and Jobs Act eliminated this limitation, which increases the value of the credit for affected businesses.
- R&E capitalization requirement: The Section 174 R&E capitalization requirement for the 2022 taxable year may drive manufacturers’ desire to reexamine potentially qualified research expenditures to increase their research credit and lower their overall income tax liability.
Many of the activities manufacturers perform, while seemingly routine, can qualify for the R&D tax credit program. See below for a non-exhaustive list:
- Improving processes to advance assembly line speed due to increased production volume.
- Experimenting with new or improved packaging techniques.
- Creating prototypes using Computer Aided Design (CAD).
- Developing robots or automated technology.
- Work involving the improvement of strength, durability and service life.
These are some of the key changes to the R&D tax credit for manufacturers in the United States. It’s worth noting that the specific rules and regulations around the credit can be complex, so it’s crucial for businesses to consult with their tax advisors to ensure they are properly claiming the credit.