The federal Research Credit has been helping manufacturers, software companies and others to keep engineering and manufacturing jobs here in the United States since its inception in 1981. However, it has long had limitations that prevented some taxpayers from gaining the benefits that were intended. For example, those in loss positions or who were subject to the Alternative Minimum Tax could not receive current benefits. In addition, the value of the credit was hampered by relatively high nominal tax rates. Several important changes over the past few years have improved and strengthened the credit for all eligible filers. Continue reading
Once upon a time, manufacturing companies in the US got a tax deduction for exporting their manufactured goods to other countries. This was good because wages in America are high compared to other countries. The WTO (World Trade Organization) decided that this policy wasn’t fair to manufacturers in other countries, and so the rules were changed. The new rules allowed for a deduction of (generally) 9% of the value of all goods manufactured in the US against income tax. This was deemed fair by the WTO because both domestic and foreign manufacturers were treated equally and because it allowed the deduction for foreign companies investing in US jobs, plants and equipment.
The new tax bill has eliminated that section and replaced it with a new law: Section 199A. This highly complex law replaces the relatively simple Qualified Production calculation with a much more intricate set of rules. In essence, it amounts to this:
1) Corporations will now be taxed at 21% rather than 35% on taxable income.
2) Pass-through entities like S-Corporations, LLCs, sole proprietorships and others will be able to take up to a 20% deduction from their pass-through income, subject to certain limitations.
The plain language of the law seems to indicate that most service providers will not qualify for the deduction, and that most manufacturers will qualify. A close reading of the text of the law seems to indicate that some service providers may also qualify. However, it remains to be seen whether the regulations that are soon to be issued by the Treasury will support that interpretation.
It remains to be seen whether the big bad wolf will prevail.
As always, we stand ready, willing and able to help you navigate the ever-changing rules and regulations. Our mission is to help keep engineering and manufacturing jobs here, and to help bring distant jobs back! Call us today!
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- The Section 41 Research Credit is Preserved
- Manufacturers, Software Houses and Others are Eligible
- The Federal Credit Fosters Economic Growth Under TCJA
- Both Corporations and Pass-Through Entities Benefit from TCJA
We have fielded many questions lately about the effect of the new tax legislation, which until recently was called the “Tax Cuts and Jobs Act of 2017”, or “TCJA”. The good news for manufacturers, software companies and other eligible companies is that the Section 41 Research Credit has been preserved, and even strengthened for some taxpayers. Here is some information we hope you find helpful regarding TCJA:
Because of Senate rules relating to the naming of bills, the new law is formally titled: “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”. It may be commonly referred to as the Tax Cuts and Jobs Act or even shorter as the TCJA, so this will likely be a useful search term for more in depth information in regards to it. However, for your own personal research, it may be useful to know the full title of the bill as described above.
Our primary focus here is the federal tax credit for research and development. The program was originally codified in the Internal Revenue Code as Section 44F in 1981 and re-numbered in 1986 as Section 41 as the “Investment Tax Credit for Increasing Research Activities”. It is widely referred to as the “Research Credit”. This popular provision continues to enjoy broad bipartisan support as a cost-effective and forward-thinking way to encourage companies to invest in experimental research and development activities here in the United States. Over more than three decades, the incentives provided under this important program have been shown to lead to increased investment in new and improved technologies.
In turn, many of the companies making those investments have proven to be better able to survive economic downturns and to prosper more robustly during more favorable conditions, ultimately leading to increased profitability and to increased overall tax revenues for the federal government as a result. Over time, the program has largely paid for itself in purely budgetary terms, and has created spin-off benefits in terms of increased employment and related purchases here at home, both by the companies claiming the credit and the employees added to do the needed work.
While many popular tax provisions have been eliminated by TCJA, the new law leaves this important incentive program in place. The most recent changes have broadened the availability of the credit in two important ways. First, small companies and their owners have been allowed to count the credit against the Alternative Minimum Tax (AMT). The new law repeals the corporate AMT, so larger companies will now benefit as well. Second, start-up companies and those with low levels of sales may qualify to claim the credit against employment taxes rather than profits. This provision, which has been in place for a few years now, is also preserved. It allows even unprofitable companies to gain at least some benefit as they continue to develop their technological capabilities.
Many people mistakenly believe that the Research Credit applies only to the invention of new products. While this important element of technological development is certainly qualified, the regulations extend to a far broader range of activities than one might think. For example, improved manufacturing processes also qualify, as long as the development efforts were undertaken in an experimental approach and were intended to overcome technological uncertainty regarding a trade or business of the taxpayer. Scrap reduction efforts, improved unit cost projects and enhanced worker safety efforts are a few examples of this kind of project. In a similar way, development of improved equipment, tooling, jigs and fixtures can also qualify, as long as the activities were undertaken with a sincere and documented effort to overcome technological uncertainty by means of experimentation. This can also be extended to lean manufacturing efforts in some cases, as long as the efforts undertaken were truly experimental in nature.
The new law provides special benefits to owners of pass-through entities, like S-corporations, partnerships and LLCs. Lower tax rates are available to these owners, and the full amount of the Research Credit remains available to offset the net tax due for the owners of these entities, at least for the next few years.
- Projects eligible for the federal Research Credit include experimental development of
- new and improved products;
- new and enhanced manufacturing processes; and
- related equipment, tooling and fixtures.
- Many states offer companion credits, but:
- these are only available for expenses subject to taxation in that state; and
- are only available up to a portion of the state income tax liability in many cases.
Many state research credit programs mirror or significantly overlap federal rules.
The goal of all of these programs is to help companies to keep engineering and manufacturing jobs here in the United States. Our mission here at TCA is to help as many companies as possible to maintain technological development operations here at home, increasing our national employment base and improving the earning power of our companies and their employees.
Thank you for visiting our site! As always, we are very happy to help with any questions you may have or to clarify any issues you would find helpful! Just call us at 508-842-3232 or send an email directly to me at email@example.com . We look forward to working with you, and to making these important incentives as widely available as possible in order to maximize your benefits!
With all the news developing in Washington about the proposed tax overhaul, it’s important to remember that the existing tax rules are fully in place for the 2017 filing year. That means that when you’re filing your taxes next year, it is important to consider the federal Research Credit and the various state credits that might also apply.
The federal research credit dates back to 1981, and you can expect to receive tax credits for eligible experimental development costs that your business performed during the 2017 filing year that are properly documented. This important incentive program can amount to as much as ten percent of your qualified spending on people, materials, and related investments dedicated to figuring out how or whether you can make something new or improved by experimental means. This applies not only to new products, but also to improved ones, as well as new and improved processes, software and equipment. Also, because this is a tax credit and not merely a deduction, the credit value results in a dollar for dollar reduction in your tax bill!
In addition to the federal credit, numerous state credits are also in place. No matter where in the US you are located, we would be happy to help you figure out whether you qualify for these programs, and to help you file successful claims if you do. These federal and state benefits are intended to encourage companies to keep engineering, manufacturing, and software jobs here in the United States.
Things to keep in mind when considering research and development tax credits here in North America:
Many industries benefit from Research and Development tax credits
It’s important not to discount your industry just because it seems like you might not qualify. Any company that engages in experimental development can be eligible. The important thing is that the experimentation must be intended to develop or improve an existing product or process. For example, even a manufacturer of wire coat hangers can qualify so long as the aim of the experimental effort is to develop a new or improved technical capability. Such a company might try to reduce scrap rates, or improve cycle times, or reduce part weight, or engage in any of a number of other activities, all of which can be eligible for tax credit support.
Your company does not have to be of a certain size to be eligible to claim research and development tax credits
Big or small businesses can claim tax credits, as long as the processes they are developing and testing meet the eligibility criteria. Millions of tax credit dollars are left on the table every year because many companies think they are too small to claim these credits. Large conglomerate corporations aren’t the only ones that can perform research and receive funding. It’s important to know that even your small business can compete and claim research and development tax ￼credits as well. Most US taxpayers who engage in experimental development can qualify regardless of company size.
Canadian companies can also benefit from tax credits
We also offer our services in Canada, where the federal Scientific Research and Experimental Development (SR&ED) credit serves a similar purpose. A number of provincial credits are also available and we would be happy to help you navigate the rules and requirements. This is all about keeping jobs here in North America!
As always, Tax Credit Advisors is here to help. If you want to find out if your company is eligible for research and development tax credits, we can assist you. Contact us today to get started.
There is currently a lot of uncertainty about a proposed tax overhaul coming as early as this summer. With information on the web, social media, and other places, it can be hard to discern how this tax overhaul may affect you and/or your business. Call us with any questions and we’ll provide the best analysis we can as more information becomes available.
Overhauling tax codes is never an easy task. Along with the time it takes to pass these new rules and regulations through Washington, long-term effects may not be seen immediately, and any benefits or detriments can take years to fall into place. Tax Credit Advisors keeps up to date with all of these tax codes, rules, and regulations to know how to better serve you and make the most out of your dollars.
The Federal Research Credit has been helping manufacturing and software companies to keep engineering and software jobs here in the US since 1981, and was kept in place after the most recent overhaul in 1986. We are here to help you claim your benefits successfully both at the federal and state levels, no matter what happens in Washington.
Thank you as always for the opportunity to serve you!
On October 4, 2016, the IRS published new regulations in the Federal Register detailing the rules for claiming software development under the Section 41 Research Credit. These rules are provided in Treasury Decision 9786 (opens PDF in new window). In a nutshell, the new rules clarify three important points:
1) Software that is developed for sale to third parties qualifies for the credit as long as the effort satisfies the key criteria. That is, the software must attempt to achieve a new or improved capability that attempts to overcome technological uncertainty.
2) Some internal-use software that is intended to provide new or improved interaction with third party customers or other external entities can also qualify, provided that a process of experimentation was required in order to achieve the new capability.
3) Software that is intended solely for internal use, such as an inventory control system or the like) is generally not eligible for tax credit support unless the software itself represents a significant gain in the field of computer science.
These basic findings are not new, but the latest update provides clarity to passages that were formerly somewhat ambiguous. Ultimately, the goal of the federal tax credit is to encourage companies to take financial risks, and to do so here in the United States. It has long been recognized that those companies engaging in serious technological development efforts are more likely to weather the storms of downturns and to prosper under favorable economic conditions.
As always, we at TCA stand ready, willing and able to help you with any questions you have about this issue or anything else related to federal or state research credits. Contact us today via email or call us at 508-842-3232 for your free consultation.
The federal government took significant steps to improve funding for technical development to domestic companies. A major part of this effort involved the federal Research Credit, which is intended to encourage manufacturing companies, software developers and laboratories to keep engineering, manufacturing and other science-based jobs in the United States. The popular Research Credit program (authorized under section 41 of the Internal Revenue Code) was made a permanent part of the law and no longer subject to periodic expiration. This important incentive had been suspended many times since its inception, but is now a reliable support for companies seeking to evaluate the benefits of keeping high-skilled jobs here.
The federal “research credit” is now permanent.
In addition, the following major changes were made to enhance and improve the incentive nature of this important incentive program:
1) For companies with average gross receipts over the past few years of $50 million or less, the credit is now available against Alternative Minimum Tax (AMT) calculations.
2) For companies with average gross receipts under $5 million, the credit may also be taken against employment taxes. This provision allows even companies that incurred a loss during the year to claim benefits.
The overall goal of the program is to encourage companies to keep experimenting to develop new products, processes and equipment in an effort to improve technological capabilities. It is well known that companies investing in these areas are better able to survive downturns, and prosper in upturns, resulting in higher employment and better profitability. This results in a better economy for everyone and a brighter future!
Over the past two decades, Tax Credit Advisors LLC has worked closely with manufacturers and software developers across the continent to identify, document and defend claims for this important set of incentive programs. Our goal is to help keep engineering, manufacturing and software development jobs here. Let’s see if we can help you! Our initial consultation services are absolutely free, so please call or respond via the “Contact Us” link above.
On May 20, 2015, the House of Representatives passed a measure that would extend the IRC Section 41 Research Credit. The bipartisan vote totalled 274 to 145. The measure aims to make the credit a permanent feature of the tax code. In order for this bill to pass the Senate, however, some means will have to be found to offset the estimated $180 billion cost that is expected to accrue over the next ten years.
The research credit has a long history, dating back to 1981 when it was enacted in an effort to bolster domestic investment in experimental development efforts here in the United States. Due largely to Senate budget rules, it has always been provided on a temporary basis. It has expired and been retroactively reinstated more than a dozen times over the past 34 years. The most recent expiration took effect on December 31, 2014.
The research credit has clearly helped to generate more spending on technical development efforts here at home over many years, and it enjoys broad bipartisan support in both houses of Congress. The net result has been to help keep engineering and manufacturing jobs here that otherwise would have gone overseas. If you support this program, please contact your Senators and urge them extend the Section 41 Research Credit.
UPDATE: President Obama has signed the bill.
Good News! The federal Research Credit has been extended through 2014! As one of its final acts, the 113th Congress passed the “Extenders Bill”, providing continuing support for the federal Investment Tax Credit for Increasing Research Activities (the §41 Research Credit) through the end of this year on December 16th, 2014. The President has indicated that he will sign the bill into law. As a result, this important incentive program will apply to all qualified research expenditures incurred through the end of 2014. The measure passed in the Senate by a broadly bipartisan 76 – 16 vote.
This means that all of the work you have done to develop new and improved products, processes and equipment over the past year can earn tax credits, and this means that there is more money for you!
The federal Research Credit program has been in place since 1981, when it was first codified under IRC Section 44f. It was retained in 1986 under the new code as IRC Section 41. This important incentive is intended to encourage manufacturers and software companies to expand their technological capabilities, thereby keeping engineering and manufacturing jobs here in the US.
This program is also intended to encourage firms from other countries to bring jobs here.
In order to qualify, companies must show that they have engaged in experimental development in an effort to overcome technological uncertainty regarding new product, process or equipment technology. Most importantly, the work must be done *here* in the US.
If you qualify, we can help you to secure your benefits. We will help you identify eligible projects, document the qualified work you have done, help you to calculate your eligible expenses, and defend your claims! Contact Tax Credit Advisors today.
The Senate is due to vote on the “Extenders Bill” which would provide continuing support for specific programs that expired at the beginning of the year, including the IRC Section 41 Research Credit. As of 10am EST on Monday, December 15, 2014, the vote was anticipated on or before Thursday, December 18th. The enabling house bill is H.R. 5771. Meanwhile, the Senate will be busy with other year-end business, including votes on several executive branch appointments.
The federal Research Credit (formally known under IRC Section 41 as the “Investment Tax Credit for Increasing Research Activities”) is intended to encourage companies to keep engineering and manufacturing jobs here in the US. It enjoys broad bipartisan support and has been in place almost continuously since 1981, when it was codified as IRC section 44f. This program has led to many billions of dollars in net research investment
The credit provides a dollar-for-dollar reduction in taxes owed for companies that try to expand their technological capabilities. Qualified efforts include traditional new product development as well as systematic process improvements and related equipment development, including tooling, fixtures and related experimentation.
It is our firm belief that this important incentive program should be extended and made permanent. We believe that a strong commitment to research and development is of strategic importance to the US, and that our best approach is to encourage companies to hire here, to train here, and to encourage our best and brightest to stay here.
So what does this mean to you?
For decades, skilled jobs have been shipped overseas. We often hear that making goods here in the US would make them too expensive. The truth is that the extra cost for most items is *less* than one tenth of one dollar per unit for t-shirts and less than ten dollars for refrigerators. It simply isn’t true that US labor is too expensive. The federal research credit is our best hope for keeping engineering and manufacturing and software jobs here in the United States.
We are closely monitoring the events in the Senate and will provide more news when it becomes available.