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Machining Industry Qualifying Activities

If you’re in the machining industry, we have a solution that could save you serious money. Research and development (R&D) tax credits are federal and state tax incentives designed to encourage innovation and technical design improvement; they reimburse companies that develop new products, processes, or inventions by up to 13 percent of the cost of qualifying research activities. By using the credit, companies can obtain tax savings, enhance their cash flow, and stay competitive in the marketplace.

This tax credit is primarily a wage credit. The majority of eligible expenses is derived from payroll—a company’s employee wages and contract research expenses. But other qualifying costs include supplies, testing, and expenditures involved in patent development. 

What Activities Are Ideal for the Machining Industry?

The IRS looks favorably on a host of activities that are commonplace in the machining industry: namely, anything involving technological advancement (and the machining industry is nothing if not technological). In terms of software development, these qualifying activities include developing robotics and automated technology; undertaking coding and programming to enhance machinery interface communication; creating finite elemental analysis (FEM) software; and advancing computer-aided design (CAD), computer-aided manufacturing (CAM) modeling and simulation, and computer numerically controlled (CNC) programming.

In terms of hardware, research also qualifies if it entails developing prototype tooling devices:

  • Experimenting with various kinds of materials
  • Creating engineering requirements for special fixtures
  • Maintaining a milling process’s speed without inviting breakage
  • Maximizing production feeds and speeds, while guaranteeing a given part’s quality and integrity
  • Maintaining uniform constraints in the lathing process
  • Eliminating or minimizing warpage for welding and fabrication processes
  • Designing technology for tight tolerances

But whether it’s for software or hardware, any activities relating to modeling, simulation, or systematic trial and error can qualify.

It's Vital to Have Accurate Record-Keeping

On September 17 last year, the IRS Office of the General Counsel released a memorandum that outlined new rules governing the submission of R&D tax credits that demand stringent recordkeeping. To qualify for the tax credit, taxpayers must now:

  • Identify all business components related to the research credit claim for that year. 
  • For each business component: 
  • identify all research activities performed; 
  • identify all individuals who performed each research activity; 
  • identify all information each individual tried to discover. 
  • Use Form 6765, Credit for Increasing Research Activities, to list the claim year’s total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses.

Getting an R&D Tax Credit Analysis to see if you qualify is the first step!

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