Erie Chamber Blog
Monday April 29,  2019
blog image

Michael S. Neubauer, CPA, CVA, MBA, McGill, Power, Bell & Associates, LLP

The Credit for Increasing Research Activities, or R&E Tax Credit, has been around since 1981.  Over time, the credit has evolved and its benefits have become more inclusive and more lucrative, yet many companies in our region have been slow to adopt this tax credit.   

Prior to regulation changes in the early 2000s, capability, method, and design all had to be uncertain in order for activities to qualify for the R&E Tax Credit. An additional requirement was the discovery test, which called for typically patentable knowledge that exceeded that of other professionals in the field.  In the early 2000s, these requirements were modified so that only one of these items (capability, method, or design) is required to be uncertain, and the discovery test was eliminated.  Lack of awareness of these key changes is likely a contributing factor to companies not claiming the credit.  In the case of most custom manufacturers, the capability to do the job and the method by which the job will be completed are certain.  However, if design at the onset differs from design at the completion of the job, the design is considered uncertain and the expenditures incurred would likely qualify for the R&E Tax Credit.  A company that has design uncertainty, and goes through a process of experimentation in order to eliminate this uncertainty, would qualify for the credit.

There are R&E tax credits at both the Federal and Pennsylvania level, each offering benefits that have the potential to make a significant impact on a company’s cash flow.  Expenditures of R&E projects used to compute the credit include wages, materials/supplies, and outside services used in activities prior to the point of commercial production.  This includes, but is not limited to, the time and materials related to production costs, as well as testing and modification of custom tools, dies, molds, production construction costs, and payments to suppliers.  Additionally, recently released regulations allow for a simplified version of the credit (the Alternative Simplified Credit) to be claimed on an amended return, significantly expanding the potential impact of the credit in the first year it is claimed.

Industries that are typically eligible to receive significant benefits include, but are not limited to: plastic injection molders, powder metal, tool & die, fabricated metal, chemicals, primary metals, aerospace, and other custom manufacturers.

With the proper understanding of the R&E Tax Credit, a substantial benefit can exist that lowers a company’s tax burden and helps them be more competitive in the marketplace.  Recent changes resulting from the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made the R&E tax credit permanent, gave eligible small businesses the ability to offset the alternative minimum tax (AMT) with the R&E Tax Credit, and allow certain businesses to utilize the R&E Tax Credit to offset payroll taxes.  Given these recent changes, now is the perfect time to begin assessing whether or not your company qualifies for R&E Tax Credit benefits.

TAGS:
  • tax credit
  • federal
  • pennsylvania
  • research
  • experimentation

latest news

The 2022 Celebration of Excellence Award Winners Announced
August 1, 2022
The Erie Regional Chamber and Growth Partnership (ERCGP) announced its annual Celebration of Excellence award recipients. This year's e...
Erie County Redevelopment Authority Lends Over $1.6 Million During Second Quarter
June 29, 2022
Today, Chris Groner, Vice President of Capital Finance & Lending at Erie County Redevelopment Authority (ECRDA), announced the ECRDA’s 2022 ...
Erie County Redevelopment Authority Announces New Diversity Loan Program
May 26, 2022
Erie County Redevelopment Authority (ECRDA) is excited and pleased to announce the creation of a new minority Diversity Loan Program.   The ...