Key Takeaways
- Manufacturers can see significant benefit from R&D tax credits for developing new or improving existing products and processes.
- Recent changes, such as the amendment of Section 174, require the capitalization and amortization of research expenses, impacting tax liabilities.
- Eide Bailly offers experienced guidance to help manufacturers navigate and maximize benefits from the R&D tax credit and Section 174 changes.
Businesses implementing new or existing manufacturing processes or developing or enhancing products may benefit from the R&D tax credit. The credit is a permanent benefit offered annually and is best claimed on an originally filed tax return, but can also be claimed on an amended tax return for open tax years.
While the credit can fluctuate year-over-year, a company with $500,000 in qualified R&D costs during a tax year can typically see a benefit between $30,000 and $40,000.
Many states also offer R&D credits or incentives, which can increase the available benefit to offset state taxes and may be refundable in certain states.
Additionally, manufacturers may be able to utilize more R&D credit given the law change around Section 174 through the Tax Cuts and Jobs Act (TCJA), as many companies are seeing temporarily increased tax liabilities from the requirement to capitalize and amortize R&D expenditures. Lawmakers have contemplated a legislative fix concerning the TCJA provisions on expensing research costs; however, a legislative fix is not anticipated until 2025.
Qualifying Manufacturing Activities and the R&D Tax Credit
R&D tax incentives are not just for technical companies or those investing heavily in R&D activities. Many day-to-day company operations potentially qualify for the R&D tax incentive. To qualify, a project must satisfy the four-part test, as outlined in Section 41(d) of the IRC.
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Qualifying activities for the R&D credit for manufacturing entities include:
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Possible job titles within manufacturing entities that could qualify for the R&D credit include:
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Recent Changes Regarding Section 174 and How it Applies to Manufacturers
In 2017, Congress passed the TCJA, which requires the capitalization and amortization of specified research or experimental (SRE) expenditures incurred in tax years beginning after 12/31/2021 over a five-year period with a half-year convention. This means the option to fully deduct SRE costs in the year incurred is no longer available, resulting in generally higher taxable income for many companies.
The IRS released guidance and clarification on Section 174, with proposed regulations on the capitalization and amortization of SRE expenditures. Taxpayers with qualified R&D activities under Section 174 are likely to meet the criteria to claim federal (and potentially state) R&D tax credits. These credits will help reduce the capitalization burden resulting from the recent changes to Section 174 and may reduce current tax liability.
How Eide Bailly’s R&D Tax Credit Team Can Help
Manufacturers can benefit from Section 174 and the R&D tax credit. It’s important to consult with a trusted business advisor when claiming the R&D credit as well as the required reporting standards relating to Section 174.
Eide Bailly’s Research & Development Tax Credit Team can help your manufacturing entity navigate and benefit from Section 174 and R&D.
R&D Tax Credit Calculator
