Simplified Research Credit Helps Manufacturers’ Cash Flow
By David Click, Tax Director, RSM McGladrey
Recent tax law changes make the research tax credit more attractive to manufacturers. The research tax credit provides a permanent tax benefit and is available as both a federal tax credit and a Massachusetts tax credit.
A barrier to claiming the research credit has been the complexity of calculating the tax credit. For 2007, Congress greatly simplified the mechanics of the calculation to make the research credit readily available to more companies. Even if a company has not claimed credits in the past, the simplified credit calculation should provide more companies greater access to this tax benefit.
For manufacturers, the research credit is sometimes overlooked as it is often assumed the benefit is designed for hi-tech companies. Not only can the research credit be claimed for the development of new products, the credit is also available where a manufacturer invests in improvements to the manufacturing process. Expenses incurred in improving the manufacturing process or achieving cost efficiencies are eligible for the research tax credit.
Although the research credit has been a fixture in the tax law since 1981, as a tax incentive it was often difficult to calculate. The research credit is incremental, rewarding a company for increasing its research expenses over a fixed "base" amount. Calculating the "base" amount of research is sometimes difficult as it relies on taking a "snapshot" of research expenses going back into the 1980s.
The complexity of calculating the credit caused many companies to shy away from claiming the research credit. When Congress reauthorized the credit this year, a new Alternative Simplified Credit was added to the tax law. The new method relies on more current information for determining the "base" threshold, and therefore opens the research credit to more companies.
In order to maximize the tax benefit, it is important to analyze activities to insure that research expenses meet the definition of "qualified research" found in the tax law. Collecting relevant documentation that describes the research activities is critical to sustaining the tax credit. Involving a research credit expert in these steps will help achieve the maximum tax credit that can be sustained before federal and state tax authorities.
Manufacturers will want to look closely at claiming the research tax credit as they invest in improving their manufacturing processes and techniques. The simplified credit, available in 2007, will make the credit easier to calculate and claim. A research tax credit is also available in Massachusetts and many other states, which generally follow the federal rules. As a permanent tax benefit, the research tax credit can reduce a manufacturer’s tax burden, increasing overall cash flow and profitability.
