In this space last month, I wrote about the current improving economic climate in plastics and reported on research we conducted last fall showing that more plastics processors will be investing in new equipment in 2011 than in any year in recent memory. With that in mind, why not take a look at the federal tax Credit for Increasing Research Activities (aka the Research & Experimentation or Research & Development Tax Credit) to see if your pending investments qualify under the law?
Adam Herman, Richard Wile, and Richard Pickett are members of Mueller Prost PC’s R&E Tax Credit Group, a division of a regional CPA and business advisory firm located in St. Louis, Mo. They have put together a summary paper on the tax credit and under what conditions it can apply to you. (The full paper is available on this website. Just click on Blog on the top navigation bar, and read the one that is headlined “Take Advantage of R&E Tax Credit”).
According to the Mueller Prost team, the credit is available to plastics processors as a reward for investments in innovation to develop and improve products and/or processes, and is a potential source of funding for the cost of equipment and technological improvements. Eligible activities include the design of a new component or the improvement of an existing component design, subject to several criteria:
These activities must be based on science or engineering principles. There must be technological uncertainty relative to the outcome of the project with respect to capability (“Can we do it?”), method (“How do we do it?”), and design (“How do we design it?).
A process of experimentation must be present, including systematic trial-and-error associated with the development or improvement of the product and/or process.
Examples of qualified activities in plastics processing include:
•Design of a new part or improvement of an existing part: CAD modeling involving multiple design iterations; production of prototype parts; testing of prototypes; development of a quality plan to ensure attainment of specifications.
•Development of new or improved manufacturing process for production of a plastic part.
•Experimentation with new or improved processes.
A November 2009 Tax Court decided that the credit could be applied to tooling projects as well, according to Mueller Prost. Below is a scenario they created to explain how:
1. The OEM contracts with a molder on a new part.
2. The molder conducts a process of experimentation: The mold is designed and a manufacturing process is developed, along with the parameters specific to that job, which are needed to produce a part meeting the customer’s specifications.
3. The molder obtains a prototype mold either from a third-party moldmaker or by using internal resources. This allows for production of a prototype part, likely leading to further experimentation to meet the specifications.
Once approval has been obtained for the prototype part, the molder obtains the production mold—again either from a third-party moldmaker or internally.
4. Further experimentation is required by the molder using the production mold to improve part quality to meet specifications.
5. Upon receiving approval for the initial run of production parts, the molder sells the production mold to the customer.
In this case, the cost of the prototype and production molds may be claimed as supply costs for the R&E Tax Credit by the molder.
The clock is ticking, especially for companies with March 15 corporate filing deadlines, to get the credit included on their originally filed return. Good luck.