2021 Marcum National Manufacturing Survey

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THE 2021 MARCUM NATIONAL MANUFACTURING SURVEY

L E V E R AG E TA X C R E D I T S TO I N N O V AT E

by Jonathan J. Shoop | Marcum llp

Developing new products and improving existing products and processes were recurring themes in this year’s survey. Manufacturers recognize the need to innovate so they can remain competitive while keeping costs down. Great research and development (R&D) processes play a key role in driving this innovation, but they can be very expensive. That’s where the R&D tax credit comes in. The federal R&D tax credit is a dollar-for-dollar offset of federal income tax liability. Federal R&D credits are available for up to 14% of qualified research expenditures (QRE), both for in-house research and contract research. ELIGIBLE ACTIVITIES A wide variety of expenses can be considered QREs, but they generally include wages paid to qualifying employees and associated expenses used to develop a new product or process. Here are a few examples of manufacturing activities that may qualify: X Designing and testing prototypes. Most states provide a similar credit, so the combined federal and state credit can offset even more qualified spending. AN UNDERUTILIZED RESOURCE Considering the vast majority of survey respondents dedicate at least one full-time employee – and in many cases dozens – to R&D efforts such as new product development, innovation, and research, it’s likely that most companies are missing out on significant potential benefits. If the R&D tax credit offers so many benefits and helps manufacturers thrive in a deeply competitive global environment, you’d think everyone would use them — yet less than half of respondents are tapping into this program. Many eligible companies don’t realize they qualify for the credit and miss out on readily available assistance. X Designing manufacturing equipment. X Optimizing manufacturing processes. X Designing and developing tooling and equipment.

While lack of understanding plays a role, the program can be intimidating to navigate. In Ohio, for example, the R&D credit applies against the Ohio Commercial Activity Tax (CAT), but the R&D credit cannot reduce the CAT liability below the minimum fee. Any unused credit can be carried forward for seven years. WELL WORTH THE EFFORT Yes, R&D tax credits can be tricky and require careful planning, but the compelling value they deliver means that you should take full advantage. Just be sure to adhere to the rules and keep the proper paperwork your tax advisor will need to help you secure the credit and pass an audit. Most states offer credits ranging from 2% to 6%, potentially allowing your business to realize 6% to 14% of your original investment. That means effective planning can allow your business to reap twice the rewards from investing in your company’s future.

Accessing the R&D tax credit effectively without running into audit pitfalls is as simple as properly planning and working with the right tax advisor to ensure compliance. MORE USEFUL THAN EVER Since the pandemic has forced businesses to pivot and innovate more than ever, the R&D tax credit probably has a role in your company’s future growth. Consider all the ways you’re working to improve operations, rework products, and boost efficiencies – chances are good some of that effort meets the requirements of the R&D tax credit. Conducting an R&D tax credit survey is a fast and easy way to determine how your business can best use these federal and state programs to thrive. Marcum believes virtually all manufacturing companies can be leveraging this program, and it can facilitate a smooth and simple process.

Jonathan J. Shoop, Office Managing Partner, Cleveland, Marcum LLP 216.242.0820 | jon. shoop@marcumllp.com