With the recent tax-extenders vote from the U.S. Senate Finance Committee, manufacturers are anticipating the extension of various tax items that have proven beneficial to the industry in the past. The legislation would extend the research and development tax credit (a.k.a. R&D tax credit or research credit) and other tax relief items through 2016, providing manufacturers greater certainty around tax planning and their expected tax liability.
The tax-extenders bill is legislation that temporarily extends expiring provisions of the tax code.
The R&D Tax Credit is particularly important to manufacturers, as many manufacturing companies are likely performing qualified research activities and thus could benefit from the credit. As recent IRS data illustrates, in 2012 manufacturing represented over 60 percent of the research credits claimed across the economy.
Under previous legislation the research credit could be applied only to income taxes, but an important innovation in the current bill permits small businesses to claim the credit against their payroll taxes.
Many startups and smaller businesses pay minimal or even zero income taxes but do, however, typically owe payroll taxes. Thus, since the extenders package allows small businesses to claim the research credit against their payroll taxes, smaller manufacturers may find a greater incentive to claim the research credit as a way to offset some or possibly all of their payroll taxes.
Further, the tax-extenders package contains a provision that allows companies to claim the tax credit against their alternative minimum tax, making the credit available to another set of manufacturing companies that may have previously been unable to take advantage of the credit.
The extenders package is especially important for small and startup manufacturers, but companies of all sizes may benefit from the passage of the bill. If the package is enacted, manufacturers that use the tax credit will benefit from increased earnings per share and cash flow and a reduced effective tax rate.
As of this writing, the bill is with the House of Representatives, which will consider the bill as is or introduce their own legislation. Since enacted in 1981, the R&D Tax Credit has been extended more than fifteen times, retroactively or otherwise. Small, medium, and large size manufacturers alike should take note of the proposed changes to the research credit and determine how the provisions could benefit them.
Chai Hoang is a Senior Associate with BDO’s R&D Tax Services Practice for the Northeast U.S. region. She helps clients identify R&D opportunities across a variety of industries, including manufacturing, consumer products, financial services, technology and software. Chai can be reached at email@example.com.
Joseph Eliya is an Associate with BDO’s R&D Tax Services Practice for the Midwestern U.S. region. He is focused on identifying R&D opportunities for clients involved in science, technology, and engineering activities, among others. Joseph can be reached at firstname.lastname@example.org.