Strategic discussions can help manufacturers maximize the benefits of R&D tax credits

Research and development (R&D) tax credits, available at both the federal and state levels, provide companies with a dollar-for-dollar reduction in income and payroll taxes for qualifying expenses. Manufacturers can take advantage of the credits to support the assessment and implementation of emerging technologies that are relevant for business growth. On average, R&D tax credits equate 7% to 9% of eligible activity costs, such as wages, supplies, cloud service provider costs, or contract research costs, as described below.

Speaking at the virtual PowerPlex 2020 conference in May, Baker Tilly Director Ryan Holzhueter emphasized that while companies are well aware of R&D tax credits since they’ve been around for almost 40 years, they may not be aware of how quickly new technologies that are eligible for a tax credit come onto the market. Growth strategy conversations at a manufacturing company have to include every level of operations – from the C suite to supply chain to procurement to shipping – because every function will have different views of what technology is available and what it enables.

Manufacturers can take advantage of tax credits that allow them to adapt technologies that will support the strategy, planning and execution of new initiatives. Qualifying technologies include things like enterprise resource planning (ERP) solutions, blockchain, 3D printing and smart factories.

Contextualizing a manufacturing enterprise...

Eligible activities for credit

Activities must meet four IRS criteria for eligible costs to qualify for the R&D tax credit:

1. Technological in nature: Activities must rely on engineering or scientific principles (e.g., mechanical engineering, electrical engineering, computer science)
2. Permitted purpose: Activities must be aimed at developing a new or improved product or process
3. Technical uncertainty: