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R&D Tax Credits for the Machining Industry

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.

The R&D 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. – Learn More

Passing the Four-Part Test

To receive the credit, the IRS requires your R&D activities meet this four-part test.

Find out if you can pass the test here

Two crucial points

  • R&D tax credits aren’t reserved for only for successful projects. It’s okay if your efforts resulted in failure. 
  • You don’t have to develop a product or process that’s new to your industry; it only has to be new to your company.

What Qualifying R&D 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. Other qualifying activities are maintaining uniform constraints in the lathing process; eliminating or minimizing warpage for welding and fabrication processes; and 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.

Additional Tax Advantages: Alternative Minimum Tax Offset—Plus $250,000 in Payroll Offset for Startups

If you operate a small business with $50 million or less of gross receipts, you can claim your R&D tax credit against your Alternative Minimum Tax (AMT) tax bill.

If you’re a startup in the machining industry—even if you’re not paying federal income tax—you can use your R&D tax credit to offset up to $250,000 of your FICA payroll tax for your first five taxable years. But you must have gross receipts of less than $5 million in the tax credit year, along with zero gross receipts for any taxable year before the five-taxable-year period that ends with the tax credit year.

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.

R&D Tax Credits Can Fund Business Development

For your company, there’s a bigger advantage to R&D tax credits than just the immediate tax windfall. With the credit’s dollar-for-dollar cash savings, you could hire new employees, enlarge your production facilities—and beef up your R&D activities, so next year, you can recoup even more in R&D tax credits and continue the beneficial cycle of cash infusion. For a free, no-obligation R&D tax credit analysis, contact Engineered Tax Services. We can help get you a credit for the maximum tax dollars realistically possible, backed by an audit defense.

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

eBook: The Architect's Guide to R&D Tax Credits

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