How the R&D Tax Credit is Impacting Wood PAckaging Professionals
By Jill Neuvirth
Wood packaging is seen as a high quality and cost-effective shipping platform option, and is widely accepted as an economical, sustainable and environmentally friendly product.
With continued advancements in packaging and container design, and manufacturing distribution and processes, innovating wood packaging professionals using technology can potentially package federal tax savings too, in the way of the R&D tax credit.
These credits are not limited to scientists and medical researchers. For example, companies that lease the PDS™ or other engineering software in their facilities, may qualify for the R&D tax credit. The permanent extension in 2015 made this credit more broadly available across industries and activities.
What is the R&D Tax Credit?
The R&D Tax Credit is a federal incentive designed to help companies that invest in innovation or rely upon technology, such as the engineering disciplines, to develop their products and processes.
To qualify, research project activities must meet the definition of qualified activities defined in IRS Code §41. Projects that qualify must pass a four-part test by meeting the main criteria below:
- The activity’s purpose must be aimed at the development or improvement of a product, process, technique, formula, invention, or software application.
- The activity must attempt to eliminate technological uncertainty present at the outset, concerning the capability, method, or appropriate design for developing or improving the business component.
- The activity must be technological in nature, meaning it relies upon the hard sciences (e.g. engineering, biological science, chemical science, computer science); and
- The activity must rely on a process of experimentation, which may include modeling, simulation, or systematic trial and error.
Qualified costs include wages, supplies or materials used in the conduct of research, and contract research costs. In addition to the Federal Credit, many states have programs that mirror the Federal one, thus offering an additional opportunity.
How Can Wood Packaging Professionals Benefit?
Today a company that is using some form of technology to develop its products, services or manufacturing skills, is likely to qualify for R&D tax credits. Companies do not need patents or even an R&D department to qualify. In fact, the IRS continues to expand the definition of qualifying R&D.
If your company designs and manufactures pallets and wood packaging, you are likely to be constantly improving your products and processes to remain competitive. You may be experimenting and developing alternative packaging designs, creating efficiencies in production and distribution, or developing and implementing advanced technology. Pallet manufacturing companies and sawmills that use technology, such as the Pallet Design System™ (PDS), log grading or sorting software, or other pallet design technology, may qualify for the R&D tax credit.
Some examples of wood packaging industry activities that may qualify for the R&D tax credit include:
- Designing or developing new or improved process
- Testing product design requirements and specifications
- Designing and developing processes to reduce costs or improve performance
- Developing processes or technology to reduce costs and product damage
- Developing technology, software or mobile applications for research and development
- Developing product specification software
- Developing prototypes or samples
- Researching characteristics including stackability, durability, weight, environmental effects
- Streamlining processes through automation
- Integrating new materials to improve product manufacturing processes.
In late 2015, Congress expanded the ability to monetize the research tax credit. Eligible small businesses, defined as those with average sales of less than $50 million over the prior three tax years, will be able to use the credits to offset the Alternative Minimum Tax (AMT) for tax years beginning after December 31, 2015.
Additionally, certain startups companies can use the research credit to offset the employer’s payroll tax (i.e. FICA) liabilities. To do so you must meet certain criteria, including having sales of less than $5 million in the current year and have had less than five years of revenue.
Documentation is Key
Documenting potentially qualifying expenditures is the key to claiming the R&D tax credit. It’s important to document the entire process, to show costs by project, and to establish a nexus between qualifying activities and expenditures. Examples of documentation may include:
- Time tracking and project tracking
- Product or project specifications, descriptions or proposals
- Support for supplies and materials used in the conduct of research
- Contracts with consultants and customers
- Email communication.
If your company is engaged in any of the above activities, you may be able to claim the R&D tax credit. If your goal is to improve operations with technology now or in the future, an R&D tax credit professional experienced in wood packaging can help you to understand how to document your R&D efforts. Be sure to contact your tax adviser to determine if you are eligible for the R&D tax credit.
Sidenote: Over 100,000 U.S. taxpayers claimed more than $12 billion in federal R&D tax credits in 2014 for work their companies performed on a day-to-day basis. While there’s no question that large, Fortune 500 companies account for a significant portion of the overall research performed and the credit dollars claimed each year, it’s important to note that the R&D credit isn’t limited to large companies with established R&D departments. Contact your tax advisor to learn more specifics about your eligibility for R&D tax credits, and visit the IRS website - http://bit.ly/2jBSbj3 - for tax tips on research and development for manufacturers.
(Article published in PalletCentral Magazine, November-December 2017)
Jill Neuvirth is President of Monetek. Monetek offers companies of all sizes a unique mix of expertise to maximize their tax credit opportunity. Phone Jill at 248-982-7646, or visit www.monetek.com