Page 16 - MetalForming June 2014

Best Practices
By Bob Dobrowsky
R&D Tax Credit—New Benefits for Metalformers
Although the Research and Development (R&D) Tax Credit expired at the end of 2013 (for the ninth time since 1981), the Senate Finance Committee recently took the first step in passing the Expiring Provisions Improve- ment Reform and Efficiency (Expire) Act. This legislation would reenact the credit and extend it for 2014 and 2015—great news for metalformers, made even better considering that the proposed legislation includes more benefits than ever before.
The Definition of R&D
Historically, qualified expenses eligible for R&D credits have included wages, supplies and contract research—for companies that incur these expenses in an activity that involves product development, process improvement, tech- nical uncertainty or experimentation (Fig. 1). The credit is a true credit—not a deduction—that metalformers can use to offset against their regular tax.
claim the R&D tax credit against the Alternative Minimum Tax (AMT). This is outstanding news for S Corps and partnerships, which pass all of their income through to their individual own- ers’ tax returns. Currently, individuals only can reduce their tax down to AMT; if the Expire Act passes, owners may be able to reduce their tax even lower, if they have enough in R&D credits.
Startups May Now Be Eligible
Legislation also would allow startups, not yet paying income tax, to benefit from the R&D credit for the first time ever; com- panies can take a credit of as much as $250,000 against the pay- roll taxes it pays on employee wages. However, only companies that have been around for less than 5 yr. and have less than $5 million in annual gross receipts would be eligible.
Claim the Credit for Sold Prototypes
Research expenses include costs to develop a product, including a pilot model. Proposed regulations issued in Sep- tember 2013 define pilot models as fully functional proto- types. In addition, the proposed regulations clarify that the use or sale of the product is irrelevant in determining whether a cost qualifies.
In the past, many taxpayers only included expenses as qualified for the R&D credit if prototypes were used, con- sumed and disposed of. The new proposed regulations would allow metalformers to claim the credit for prototypes that are sold. No longer does the end use matter—prototypes may qualify whether they sit in inventory, are destroyed or are sold to customers. This is great news for metalformers who might spend upwards of $1 million on a single prototype or tool.
Process Improvements Also May Qualify
Even if a metalformer never makes new parts or designs new products, as long as it makes improvements to the manufacturing process that increase efficiency, quality, reli- ability, etc., it may qualify for an R&D tax credit. Companies that employ industrial, process or manufacturing engineers should look into this in particular.
What’s Next?
The bill now heads to the Senate floor. Given the strong bipartisan support, it likely will be brought forth for consider- ation sooner rather than later. The consensus is that legislation won’t pass until after the November elections. Still, metal- formers would be wise to look at these R&D opportunities and determine how they might apply to their organizations. MF
The author thanks Amy Forester, a tax associate with Plante Moran specializing in helping manufacturers maximize the value of their available tax incentives.
Permitted Purpose
The activity must relate to a new or improved product or process intended to improve:
• Function
• Performance • Reliability
• Quality
Elimination of Uncertainty
The activity must be intended to discover information to eliminate uncertainty related to:
• Capability of a product or process • Method of a product or process • Appropriate design of a product
or process
Process of Experimentation
Substantially all of the activities must relate to a process of exper- imentation involving:
• Evaluation of alternatives
• Confirmation of hypotheses through trial and error, testing and/or modeling
• Refining or discarding of the hypotheses
Technological in Nature
The activity performed must fundamentally rely on:
• Physical science
• Biological science
• Computer science • Engineering
Fig. 1
Claiming the R&D Tax Credit Against the AMT
Perhaps the most exciting potential development, the pro- posed legislation allows small and medium-sized businesses to
Bob Dobrowsky is a partner with the Cleveland office of Plante Moran, PLLC, and is one of the leaders of the firm’s Ohio Manufacturing and Distribution prac- tice. He has been delivering professional services to privately held companies for the past 21 years. Bob has authored the annual PMA Benchmarking Report since 2003, serves as a member of the board of directors for PMA’s Cleveland district, and has pre- sented at various district level meetings. www.plantemoran.com
Bob.Dobrowsky@plantemoran.com
14 MetalForming/June 2014
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