SoloPoint Insights

Myths About The R&D Tax Credit

Companies who specialize in product design, research and manufacturing may qualify for the Research & Experimentation Tax Credit or “R&D Tax Credit”. But do they take advantage of this? Here are some misconceptions that may hinder companies from filing:

The U.S. R&D tax credit could be worth up to $10 billion annually to small and large firms. Yet evidence shows that only one of out of 20 small and medium-sized companies eligible for this credit actually use it. Why is that? It seems there are myths surrounding the credits that dissuade smaller companies from filing for them, according to Rizwan Virani, managing director of AlliantGroup. His group, an organization of business and CPA firms, encourages U.S. businesses to take full advantage of all available federal and state tax credits, incentives, and deductions. Here, Virani unwraps several of those myths:

Myth #1: The tax credit is only for companies with labs staffed by white-coated scientists and engineers.
Although companies doing basic research are prime candidates for this tax credit, the credit also goes to firms doing applied science, that is, solving customer problems or production issues using scientific principles. For example, a manufacturer recently earned $265,000 in federal and $16,000 in state credits for improving die casting, metal stamping, and precision-tools development processes. These funds were for improving the work the company did on a daily basis.

Myth #2: The R&D tax credit isn’t for companies in my industry.
Thousands of manufacturers can secure the R&D credit for any number of eligible activities, including iron casting, sheet-metal plating, hot stamping, injection molding, plastics, modeling, and more. Company auditors and accountants who don’t think their companies qualify for the credit should check the rules on the books.

Myth #3: The R&D tax credit won’t help with state taxes.
Not so fast. Thirty-eight states have a state R&D tax credit—and several states are looking at expanding theirs or creating one. Alliantgroup says it has worked with several companies that have been able to use state R&D tax credits to eliminate or significantly reduce state income taxes. For instance, a manufacturer of injection-molded components earned not only $154,000 in federal credits, but also $178,000 in state credits for its work. In most cases, if your company is eligible for the federal credit, it should also benefit from the state credit.

Myth #4: The R&D tax credit won’t help the bottom line.
The R&D tax credit was created with the manufacturing industry in mind to find federal and state tax savings ranging from tens of thousands of dollars to well over $1 million. For instance, a steel-ring manufacturer recently bumped up its bottom line with $406,000 in federal credits for product design improvements. And a plastics molding company added $116,000 in federal and $91,000 in state credits to the plus column.

Myth #5: It’s too good to be true.
The R&D tax credit benefits thousands of companies in a wide range of industries every year. The credit has been part of the IRS Code since 1981. But the IRS isn’t giving away this tax credit; you need to properly document your activities and correctly apply the law.

Looking for engineering talent to support your company’s research and development? Contact the experts at SoloPoint today at (408)246-5945 or (714)708-3639.