American companies in various industries are pitching in to help fight against coronavirus and COVID-19. How does the R&D tax credit apply towards these efforts?
By: Shaun Yeh, Director, Tri-Merit
The R&D tax credit is a powerful federal tax incentive that helps businesses improve their offerings and compete while significantly reducing their tax burden.
It incentivizes the development of new and improved products and processes. The purpose of the credit is to keep good jobs in the U.S. and increase global competitiveness through technological advancement.
The coronavirus pandemic has disrupted business operations worldwide, many American businesses are responding to the call to action against coronavirus and have shifted operations to help battle the pandemic.
How U.S. Businesses are Helping Fight Coronavirus
These companies are developing new or improved production capacity from vaccines to diagnostic tools to personal protective equipment (PPE) to help with the effort. Large corporations and small businesses alike are developing new and improved solutions to halt the spread of the virus.
Companies within medical technology, life science, and pharmaceutical sectors are very familiar with the R&D tax credit, and they are expected to be among the forefront of industries that bring forth new and improved products and processes to combat the pandemic.
Adaptation Across Industries
Just as the American automobile industry converted their assembly lines during World War II to making B-24 bombers, M3 tanks, and even the atomic bomb to provide the U.S. military with the machinery and artillery to win the war, today’s American businesses are rapidly converting operations and retooling to help in the current effort against COVID-19.
American breweries and distilleries are converting surplus supplies of alcohol to hand sanitizer. American sportswear and sports equipment manufacturers have converted manufacturing lines to making protective masks and gowns for medical personnel.
Additive manufacturing companies have utilized their 3D printing centers to make masks, face shields, and ventilator parts. American companies that used to make underwear are also now producing isolation gowns.
There are some even more unconventional examples of this effort as well. GelPro, a Texas-based maker of floor mats, has shifted part of its Waco, Texas, factory to producing face shields that have been sent to healthcare workers in New York. Oklahoma-based Covercraft Industries, which normally manufactures car covers and seat covers, has brought its manufacturing and engineering ability to the production of PPE.
“Covercraft’s expertise in working with non-woven specialty fabrics has allowed us to pivot our operations in the USA from crafting car covers, seat covers, and windshield sunscreens to helping provide hospitals and first responders with personal protective equipment incredibly fast,” says Clay Callan, President and COO of Covercraft Industries. Covercraft has shifted to making protective gowns and masks for healthcare workers and first responders.
Where the Tax Credit Comes Into Play
This adaptation of expertise to the changing business landscape during this pandemic highlights the nature of the R&D tax credit and its broad applicability to American companies that are undertaking projects that are new or require improvements to their processes.
The activities that count toward qualified research activities for the R&D tax credit are not limited to experiments conducted in a laboratory. Companies across the country are often unaware that the design, development, and tooling of various production capabilities for new applications for their company will often qualify for the credit.
The retooling and development efforts that American companies undertake to convert operations to help fight the pandemic can result in significant R&D incentives. The solutions do not need to be revolutionary to the field; they simply need to be a new product or process for the company to be considered for qualification towards the R&D tax credit.
The R&D Tax Credit Isn’t Just for Science and Technology Companies or Huge Corporations.
The credit is for American businesses that work on a wide range of project types.
Qualification for the R&D tax credit isn’t based on the industry or type of business but rather on the activities that a company performs. Potentially any company with “qualifying business activity” can take advantage of the credit.
In fact, companies such as manufacturers that are retooling to produce items such as PPE are a good fit for the R&D tax credit, as they look to develop new or improved products and processes.
Examples of COVID-19 centered activities that may qualify include (but aren’t limited to):
- Conversion of manufacturing capabilities to new products (such as PPE)
- Engineering involved with new products or processes
- Software and computer numerical control (CNC) programming
- 3D printing of essential products and components
- Assembly line and quality assurance improvements
You don’t have to be a large firm to qualify for the R&D tax credit. Even qualifying startups and small businesses with little or no federal income tax burden may use the tax credit to offset their payroll tax or AMT.
The IRS uses a four-part test to determine if a business activity qualifies as research. We’ve provided the test here, along with a list of common qualifying activities for engineering firms. You may be surprised by what may qualify.
IRS Four-Part Test for Qualifying Business Activity
1. Qualified Business Component
The activity must relate to a new or improved product, process, formula, computer software, program, technique or invention.
2. Technological in Nature
The activity being performed must fundamentally rely on the principles of physical science, biological science, chemistry, computer science or engineering.
3. Eliminate the Uncertainty
The activity must be intended to discover information to eliminate uncertainty concerning the capability or method for developing or improving a product or process or the appropriateness of the product or process design.
4. Process of Experimentation
The experimentation process needs to include the evaluation of alternatives. Examples of acceptable processes include systematic trial and error, prototype creation and testing, computer aided modeling, and simulation in an effort to resolve the technical uncertainty.
It Looks Like My Firm May Qualify. What’s Next?
Determining if your firm qualifies for the R&D tax credit requires an evaluation of the facts and circumstances of your activities. It’s a complex process, but it’s not something you have to handle on your own as an owner or accountant. You can work with a specialty tax partner like Tri-Merit.
Here are the steps.
1. Get a Feasibility Analysis
Tri-Merit will do much of the upfront work to determine if you qualify, at no cost. This is our standard phase one feasibility analysis. We examine your ability to capitalize on the credit. A feasibility analysis saves valuable time by identifying potential problem areas before committing to a full tax study.
There’s no risk in exploring the possibilities. Call (847) 637-5677 for more information or to set up a consultation.
2. Get an R&D Tax Credit Study
Tri-Merit simplifies the process of determining:
- the size of your potential credit
- the usability of those credits
- the appropriate method for supporting the credit claims so they hold up under the most stringent IRS scrutiny
Every Tri-Merit study includes audit defense, so we’ll be with you every step of the way.
The goal is to optimize the return from the R&D tax credit through genuine consultation, expert evaluation and proper documentation processes.
Tri-Merit Makes the Process Simple
Tri-Merit’s team of engineers, attorneys and CPAs make the process easier by taking a customizable, flexible and thoughtful approach to produce the best possible outcome. We engage clients in the most efficient and effective way possible, resulting in a refreshingly straightforward process.
You’ll feel confident that our team is working on your behalf to ensure:
- proper processes are followed
- IRS guidelines are met
- all reports and documentation are clear, concise and meticulously detailed to substantiate every claim
Call (847) 637-5677 to set up a free, no obligation consultation.