Accelerate Your Business Growth With R&D Tax Credits

We don’t often think of ERP systems and taxes as having anything to do with each other — in fact, thinking about taxes at all may cause many a CFO to grind their teeth.

But here’s where it pays to pay attention:

The government’s Research and Development (R&D) tax credit could very well boost your manufacturing company’s bottom line.

John Madsen is the Vice President, Manufacturing Practice Leader at Black Line Group, a business consultancy that focuses solely on helping U.S. companies reduce their tax liability using the R&D tax credit. John is also a strategic partner of ours at Syte Consulting Group.

I recently sat down with John to talk about how family-owned manufacturing companies can take advantage of the R&D credits and reap the tax windfall. I learned a lot from our discussion, and I think you will too. What follows is a summary of our conversation (copyedited for clarity).

Can Tax Credits Help Fuel Growth?

Erin: Let’s start with the big picture. How does the R&D tax credit help manufacturing companies grow faster?

John: Many manufacturing companies are looking for ways to automate, add new equipment or engineers that can help the company grow. The challenge is that they often lack the financial resources to implement these improvements, which is completely understandable. Those are cash-intensive activities, and the investment is usually front-loaded, not incremental.

For example, when you install new equipment or implement a new technology solution, you not only have the up-front cost of the hardware or software (and the attendant costs of implementation), you also need to train staff on how to use it, potentially change your existing workflows and processes (which results in additional overhead, at least in the short term), and factor in maintenance cycles. It all adds up.

The R&D tax credit could be the answer. The R&D tax credit provides those manufacturing companies with a way to reduce their federal (and often state) tax liabilities. The manufacturer can then reinvest those savings back into the business in ways that allow them to become more competitive, grow faster and be more profitable.

What Qualifies as an Eligible Expense?

Erin: There’s a lot of confusion surrounding R&D tax credits for manufacturing companies. How can a manufacturing leader figure out what expenses qualify?

John: That’s a great question. The R&D tax credit has actually been on the books for 40 years, but the law that governs it is cumbersome, and getting into the weeds of it can be a grind for a lot of business owners.

Many CPA firms actually partner with service providers like us to help their clients determine which expenses are eligible, but the process can be summarized in what’s called the 4-Part-Test.

• Permitted Purpose. Is the activity undertaken to achieve some kind of improvement, whether it be performance, quality, or reliability?
• Technical Uncertainty. Is the activity undertaken to eliminate uncertainty in relation to the development or improvement of a product or process?
• Process of Experimentation. Does the activity involve experimentation to eliminate or resolve technical uncertainty (for example, through modeling or simulation)?
• Technological in Nature. Is the process of experimentation based on sound principles of science (including computer science) or engineering?

(Erin’s two cents: I can see this working for ERP implementation or optimization activities — activities like designing custom functionality to accommodate a new business process, or integrating legacy systems and interfaces into a new ERP solution come to mind.)

Where does process optimization fit in?

Erin: How does process optimization qualify manufacturing companies for the R&D tax credit?

John: Well, the R&D tax credit was created to encourage the development of new and/or improved products or processes. So process optimization is baked into the intent and practical application of the R&D Tax Credit program.

There are many different process optimization initiatives that manufacturers can undertake to further reduce their tax liability through R&D credits. Things like:

• Evaluating new equipment or materials
• Installing, configuring, and learning how to use new equipment
• Enhancing software
• Streamlining manufacturing processes through automation
• Improving workflows or material handling

As long as the manufacturer continues to develop or improve the process — with some uncertainty, and evaluating alternatives — those activities are potential candidates for R&D credits.

Of course, they don’t have to make that determination themselves (nor would I recommend that) — Black Line Group specializes in helping companies determine which activities are eligible for the R&D Tax Credit, and we’re happy to help.

Further Resources from Black Line Group

We only scratched the surface in our conversation, and there’s so much more to this topic. John was kind enough to provide us with more information for manufacturing companies — I encourage you to check these out.

• What the R&D Four-Part Test Means to Manufacturers
• 6 Ways Manufacturing Process Optimization Qualifies You for the R&D Tax Credit
• How Your Design Meetings May Qualify for R&D Tax Credits
• Do Your Proof of Concept Steps Qualify for R&D Tax Credits?

Optimize Your Processes, Optimize Your Tax Savings

At a time when reducing costs and increasing productivity have become table stakes for survival and growth, manufacturing companies need to find ways to optimize their business operations and processes. And the R&D tax credit can be an incredible tool for accelerating that innovation.

Are you thinking about ERP or even just process optimization for your manufacturing business? I’d love to help you make a plan. Schedule a one-hour complimentary consulting session and we’ll talk about your current business processes and discuss some options for improving them. Schedule your time right here.