Between 2000 and 2010, the U.S. lost more than one-third of its manufacturing workforce to jobs outsourced to lower-cost foreign companies. More than 70,000 U.S. manufacturing plants have closed or left the country in the last 17 years. However, that trend is reversing, and legislation pending in Congress would improve the tax incentive for manufacturers that produce goods in the U.S.
In fact, at a time when many tax credit programs face potential elimination, several proposals pending before Congress enhance the research and development (R&D) tax credit, and manufacturers stand to benefit from them. The proposals are part of a bipartisan effort to boost the economy by improving productivity and decreasing overseas manufacturing.
The most significant bill, the Invent and Manufacture in America Act, was introduced at the end of June 2017. It encourages manufacturers to both conduct research and manufacture in the U.S. by upping the ante for the amount of tax credits they can receive for doing so.
According to recent studies, colocation of R&D and manufacturing can provide substantial improvements in manufacturing productivity. The bill provides for a phased-in increase in the R&D credit up to 25% for companies that perform the majority of their manufacturing in the U.S. The proposal, which is pending in the House Committee on Ways and Means, is likely to be considered as part of major tax reform legislation.
Another bipartisan House bill introduced in June, The Research & Experimentation Advances Competitiveness at Home (REACH) Act, simplifies the filing of the R&D credit for small and midsize companies filing for the first time. The bill, also pending in the House Committee on Ways and Means, would improve the R&D tax incentive and encourage companies to increase their R&D spending in the U.S. The REACH Act would make changes to the R&D credit to increase the credit’s efficiency and would raise the Alternative Simplified Credit from 14% to 20%.
Evolution of the R&D Tax Credit
The federal government implemented the Research and Experimentation tax credits (R&D tax credits) in 1981 to create jobs and spur technology in the U.S. The program was meant to be a temporary measure to give the economy a boost. However, the credit was extended by Congress more than a dozen times until the Protecting Americans from Tax Hikes (PATH) Act of 2015 made the R&D tax credit permanent.
Given the popularity of the R&D tax credit program, many states followed suit by establishing their own programs. Today, over 40 states, including Georgia, offer their own R&D tax credits with attractive features and additional advantages. (See our related article: Increase Cash Flow Using the R&D Tax Credit).
Although over 6,000 manufacturers throughout the nation claimed an estimated $10 billion in R&D tax credits in 2016, the tax credit remains largely unused — less than 33% of companies that qualify for the credits actually apply for them.
Claiming the R&D Tax Credit: What Qualifies May Surprise You
Does your manufacturing business resolve technological challenges through the innovative use of products and processes? Think in terms of new techniques, formulas, software, processes and the design of any new projects, such as those involving mechanical systems. Many manufacturers do not realize the R&D tax credit extends beyond basic research to include applied research.
The R&D tax credit incentivizes certain research activities by reducing a company’s liabilities for spending money on that research. Expenses that qualify are more comprehensive than you may think—Qualified Research Expenses (QREs) can include the salaries of employees and supervisors who are conducting research, supplies and even some of the research that is contracted out.
R&D tax credit eligibility largely depends on whether the work you are conducting meets the criteria established by the IRS in its four-part test. While many states closely follow this criteria, there are differences, and Georgia businesses should review rules for the Georgia R&D tax credit.
The Smith & Howard manufacturing and distribution team can help you determine whether your business and activities meet the criteria of the IRS and Georgia tests, as well as those of other states.
The R&D tax credit can be a lucrative incentive for innovative manufacturers. We will continue to monitor legislation that enhances this valuable incentive and keep you posted on developments. For more information, contact Smith & Howard at 404-874-6244 or fill out the form below.