Plastics and injection molding companies are eligible for Research & Development (R&D) Tax Credits, but often they are unaware of it. R&D tax credits are federal and state tax incentives meant to stimulate innovation, technical design, and product development and enhancement and keep the U.S. on the forefront of innovation. These tax credits reimburse companies that develop new products, processes, or inventions and offer a significant percentage back to the company for qualified research activities and qualified research expenses.
A Hidden but Immediate Source of Cash
The R&D tax credit allows companies to realize tax savings, increase cash flow, and stay competitive in the marketplace. In fact, many qualifying activities are considered day-to-day operations in the plastics and injection molding industry.
The R&D tax credit can provide a hidden but immediate source of cash for you from prior years, and it can significantly reduce your current and future year’s federal and state tax liabilities.
The Four-Part Test
If you are in the plastics industry, how do you know if you qualify for R&D tax credits? Just take this simple four-part test established by the IRS:
- Permitted Purpose: The activities must relate to new or improved business components, function, performance, reliability, and quality.
- Technological in Nature: The activity performed must fundamentally rely on principles of physical or biological science, engineering, and computer science.
- Elimination of Uncertainty: The activity must be intended to discover information to eliminate uncertainty concerning the capability, method, or design for developing or improving a product or process.
- Process of Experimentation: The taxpayer must engage in an evaluative process that can identify and evaluate more than one alternative to achieve a result. This may include modeling, simulation, or a systematic trial and error methodology.
What Activities Qualify for an R&D Tax Credit?
The following are qualified research activities for the plastics industry:
- Design and development of new or improved molds;
- Developing new or improved injection systems;
- Designing, constructing, and testing of prototype molds;
- Designing new compounds or formulations;
- Developing new applications for existing compounds;
- Development of new testing methods and protocols;
- Implementing automation processes or robotics;
- Innovative product development using computer-aided design tools;
- Designing innovative manufacturing equipment;
- Integrating new materials to improve product performance and manufacturing processes;
- Designing and evaluating process alternatives;
- Streamlining manufacturing processes through automation;
- Increasing manufacturing capabilities and production capacities
Another misconception is you must be a C-Corp to qualify, and this is not the case. Any type of entity can qualify, whether a C-Corp, S-Corp, or LLC. If your business is a flow-through, then the R&D tax credit flows through to the shareholders/members.
Additionally, many believe you must be paying tax to claim the credit. You can claim the credit even if your business is in a loss, since you can carry forward the credit for up to 20 years; and via the CARES Act, you can now carry back the credit for five years. Of course, it may not make sense to claim a credit you can’t use, but if your business is going to be in a taxpaying situation in the near future, it may make sense to claim the credit, and then use it to offset future tax.