Recently, our CFO sent an internal email request about hours spent on a few “products” that LSI produces, as these hours may qualify for a tax credit. He also informed me that our customers also could receive a tax credit for hours that LSI has spent on their projects. So, below, I am giving a very simple, maybe even over-simplified, overview on how this tax credit could apply to a manufacturing company.
The credit itself is called the Research and Experimentation Tax Credit and was enacted in 1981 and it allows companies that perform technological research to get a write off on their taxes on researcher’s wages, their supplies, and a portion of subcontractor labor (up to 65%), as long as the work is performed in the U.S. This tax credit was reinstated for the 14th time since 1981 on December 17, 2010 as part of H.R. 4853, the “Tax relief, Unemployment Insurance Reauthorization and Job Creation Act.”
Basically, there are four criteria, which I will summarize below:
- Permitted Purpose
- Elimination of Uncertainty
- Technical in Nature
- Process of Experimentation
You can read a summary about each of these criteria at a CPA website here. Also, here is a case study about how improving a manufacturing process may qualify for this tax credit. What this means is that if your company has engaged in activity where research and development was done to improve a product or manufacturing process, then you may qualify for the tax credit. This could include the work completed by LSI or other outside contractors. The key is to have a well documented case, and to have accounting principles in place that allow these R&D costs to be tracked and documented easily. The burden of proof is on the tax payer, therefore, you should contact your tax professional to investigate if and how this tax credit can be applied to work in your facility or facilities within the last year.
Useful links on the subject matter (all were used in the information provided above) are below: