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You May Be Leaving Thousands of Dollars on the Table: R&E Credit Opportunities

By: Robert J. Duktiewicz, CPA, MST

For the past several decades, Michigan has led all other states in vehicle related research and development activity, spending billions and employing more than 65,000 people. This region is the center for automotive development activity. Fortunately, for these companies, as well as non-automotive companies, Congress established the research and experimentation credit, rewarding companies for investments in innovation and improvements. Furthermore, recent developments in this tax credit have clarified opportunities that expand this tax benefit to thousands of additional companies.

Surprisingly few companies actually take advantage of this credit because often research and development is thought to be only the type of work that leads to patented or groundbreaking products. While this type of work certainly qualifies, it hardly represents where taxpayer opportunities lie. Most of the opportunities are in the heart of the everyday processes that companies immerse themselves in to meet customer demand. Merely investing into improving your products and processes may make you eligible for the credit. Processes such as designing and creating a customer prototype or testing the newly designed manufacturing process to meet quality assurance standards are examples of processes that can qualify for the research and experimentation credit.

To maximize the company's tax credit opportunities demands going beneath the surface to get a thorough understanding of the business. Process improvement costs are typically buried deep within production, engineering, design, and development and can not only include the costs of engineers, but also the costs of production workers, salespersons, key executives, and owners. Maximizing the credit requires getting a thorough understanding of this and having several detailed conversations with many different company employees. Once it is determined that your company is eligible for the tax credit, you likely are eligible for retroactive benefits, too. Typically you can file amended tax returns for the prior three years, which means you'll probably be entitled to prior-year tax refunds.

Furthermore, if your company manufactures parts that have a patent, parts for the aerospace or medical industries, complex products, parts within a highly automated system, or products within a niche market with few competitors, it is highly likely that you are eligible for the credit. Also companies with degreed engineers or developers of software that is sold or licensed to the end user are also typically eligible.

Since the tax benefits of the research and experimentation credit can be substantial, the IRS often scrutinizes them closely. Documentation is critical to successfully receiving your credit. When the documentation answers all of the IRS questions, you'll likely receive your full claim. However, when it is incomplete and disorganized without clear direction on how it meets the research and experimentation tax credit requirements, your credit may be limited or denied.

Research and Experimentation Checklist

Do you...

• Develop or improve production/manufacturing processes?
• Manufacture products?
• Develop new, improved, or more reliable products/processes/formulas?
• Develop prototypes or models (including computer generated models)?
• Design tools, jigs, molds or dies?
• Develop new technology?
• Attempt to use new materials?

If you answered yes to one or more of these questions, you may be able to take advantage of this credit. For more information, please contact Robert Dutkiewicz at 248.208.8860.

248.208.8860 | 2000 Town Center, Suite 1800 | Southfield, MI 48075

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