The landscape of the manufacturing industry has changed substantially over the past few decades. Many companies are shifting their manufacturing locations overseas to lower costs and remain competitive in an increasingly globalized marketplace. Contract and OEM manufacturers choosing to remain in the US are now looking towards the research and development (R&D) to lower tax liability and compete with other companies moving abroad.

Taxpayers developing new products and processes or improving existing products and processes are eligible to take the R&D tax credit. Manufacturers involved in developing new computer numerical control programs, improving manufacturing operations to increase efficiency, or designing new tools and fixtures should explore the R&D tax credit. Many businesses believe the myth that a business needs to be on the cutting edge of new technology or creating revolutionary new manufacturing processes to claim the R&D tax credit.

Manufacturing firms in the best position to take the R&D tax credit often encounter technical uncertainties as they undertake new projects. These technical uncertainties reveal themselves in the form of various questions, such as the following:

  • What manufacturing materials would make the most durable product?
  • What fixture design would make the manufacturing process more reliable?
  • What manufacturing process should be used to create the highest quality product?

How manufacturing firms answer these questions can ultimately lead to activity that qualifies for the R&D tax credit. To resolve the technical uncertainties, the firm must conduct a process that is designed to evaluate one or more alternatives which could include project modeling, simulation, or a systematic process of trial and error. For most firms, manufacturing personnel evaluate alternative fixture designs, develop unique computer numerical control programs, or conduct trial manufacturing runs to fine tune manufacturing processes and create the highest quality product. The time employees spend performing these kinds of activities to overcome technical uncertainties that arise during the project are key to the tax credit calculation.

Contact Parachor for a consultation regarding the R&D tax credit. Through a brief phone conversation, our consultants analyze your business activities and calculate a credit estimate to determine if the R&D tax credit makes sense for your company.