We work with a wide range of manufacturers across the country, and most of them have been impacted in a variety of ways by the COVID-19 crisis. Many have pivoted their businesses to address customer needs in healthcare or public safety that didn’t exist as needs just 60 days ago. They’re all working tirelessly to take all steps necessary to defend the sustainability of their businesses while doing everything humanly possible to protect their workforce. If you think it’s tough balancing working from home with homeschooling your kids, imagine the stress American manufacturers and their teams are feeling.
To our manufacturing clients and others...We couldn’t be more proud of how you’ve stepped up during these challenging times. You’re unsung American heroes.
Readers of this blog know our focus is usually on inbound marketing, sales, and customer service, the three tenets of growth marketing. But this post is our own COVID-19 pivot that recognizes that what many manufacturers really need right now is access to cash from sources they may not have considered.
That’s why, thanks to the expertise of a new client (Black Line Group) we’re eager to urge American manufacturers to consider investigating R&D Tax Credits to help reduce current tax liabilities, claim refunds from multiple prior year taxes, or create carryforwards that reduce taxes in future years. And if you have already been claiming the R&D Tax Credit, we recommend you get a second opinion from Black Line Group. In addition to their focused expertise on the R&D Tax Credit, they know manufacturing thanks to more than four decades of manufacturing experience.
What is the R&D Tax Credit?
R&D Tax Credits are tax incentives offered by the IRS that are broadly available to U.S. companies that conduct research and development. They’ve been available off and on since 1981 to reward innovation and encourage growth (to incentivize keeping jobs in the U.S.), and they became a permanent part of the IRS tax code in December 2015.
Small and mid-sized manufacturers often assume significant tax incentives are mostly reserved for major corporations, but the list of qualifying activities is far more expansive than most realize, even for small businesses, and it’s astonishing how many leave too much money on the table. The most interesting thing is that small and mid-size manufacturers have been doing qualified R&D activities for years in the course of their normal day-to-day business operations — they just haven’t realized those activities can substantially reduce their tax liability.
Regardless of whether your business has pursued R&D Tax Credits before, now is the time to take a serious look. Provisions included in the CARES Act now make it more attractive to consider regardless of current, past, or projected future tax situations.
R&D Tax Credit Qualifying Activities
It’s usually surprising to manufacturers who haven’t considered the R&D Tax Credit when they find out the broad range of qualifying activities included in the tax code. That’s about the same time they truly begin to understand that this code was written and passed into law to strongly encourage and enable American businesses, especially contract manufacturers, to be more competitive, grow faster, and be more profitable in their pursuit of new business and new markets. Some of the qualifying activities include:
Sales activities — meeting time to discuss product requirements, technical specs, developing quotes, etc.
Design meetings — discussions with prospects, clients, or internal staff about new or improved parts and processes
Flat blank layouts — time spent in programming activities, and experimenting with or evaluating materials
Toolmaking — the time it takes to design, build, and trial tools to complete a project
Engineering process — any new equipment acquisitions and initiatives to optimize the manufacturing process
Proof of concept — time spent building a sample or prototype for a prospect or customer
Trial production run — costs associated with the first run of a product and any adjustments needed to improve
Quality approval — Documentation of the production part approval process (PPAP) and the initial sample inspection report (ISIR)
Packaging — Developing or improving product packaging and shipping
Other Great News for Manufacturers from the CARES Act
Everyone knows by now that the CARES Act provides fast and direct economic assistance for American workers, small businesses, and families, but many aren’t aware that it also includes significant tax provisions designed to give businesses far more flexibility and latitude in using net operating losses (NOLs) as an important component of their tax strategy.
The CARES Act permits NOLs from the 2018, 2019, and 2020 tax years to be carried back to the previous five tax years. The NOL carryback can result in an immediate refund of taxes paid in those five prior years.
Any NOLs for 2018-2020 can also be carried forward to reduce or eliminate future tax liabilities. It’s clear that the CARES Act creates some incredible opportunities to reduce taxes going forward and claim much needed cash via refunds of taxes previously paid. Taken in combination with the potential credits associated with the R&D Tax Credit, manufacturers should be excited about aggressively pursuing, with the help of their tax professionals, strategies to minimize taxes paid over the previous five years as well as the next three years.
Worth the Time
Conducting an R&D Tax Credit study can take some time, but the payback potential is significant. For example, say your staff spent a total of 20-40 hours working with a specialty tax firm like Black Line Group to research and gather all the documentation to conduct the R&D Tax Credit study. While that may sound like a lot of time, what if it resulted in $200,000-$400,000 in reduced tax liability, and possibly more? That kind of payback would equate to $10,000 or more per hour in after-tax money.
Believe it or not, Black Line Group’s case studies demonstrate this type of ROI is typical. Consider what your organization could do with this new source of cash.
Consider Specialty Tax Professionals
When it comes to preparing a company’s taxes, there’s no substitute for a CPA’s expertise, but involving a specialized firm to help with R&D Tax Credits may be a wise move. Even if your CPA firm has a dedicated R&D Tax Credit practice group, chances are they lack the hands-on manufacturing experience vital to ensuring you receive full value from your R&D Tax Credit study.
If you’re thinking about pursuing additional tax savings, enlist an R&D Tax Credit specialist to work with your CPA. We’ve already helped connect some of our manufacturing clients with Black Line Group, a specialist that’s helped many others reap great results. They know what to look for, what questions to ask, and can make sure you’re not leaving any money on the table.
Of course, don’t forget to keep marketing your goods and services and letting your customers and prospects know you’re still committed to them and their needs. Like others with niche specialties, our focus is on helping complex industries like manufacturing reach audiences and improve profits through inbound marketing. Get in touch if you need help navigating your messaging and marketing through these difficult times, and check out the guide to inbound marketing below. We’re here to help.
Posted by Greg Linnemanstons With 18+ years in senior management roles at Fortune 500® and medium-sized companies, Greg has deep marketing and sales experience with CPGs and manufacturing. He leads strategic initiatives with clients and is involved in developing client inbound marketing plans. Greg holds an M.B.A. from Northwestern's Kellogg School of Management and a B.A. in Economics from Lawrence University.