While the name may have connotations of white coats and science labs, the research and development (R&D) tax credit is available across all industries for businesses that apply new innovation. Many businesses can even receive the credit for innovation for activities that they are already doing in their daily routine operations.
Qualified research activities and expenses have specific parameters set forth by the IRS. So, what might qualified activities and expenses look like for your business? Here are a few examples of how businesses in various industries might qualify to receive the R&D tax credit.
Manufacturing and Distribution
Manufacturing and distribution companies constantly engage in activities that likely fall under the R&D tax credit. This is especially true when providing customized goods to each of your customers.
Sales and Design
Creating a new product or improving existing products during the sales and design process will often qualify as a research activity. There will usually be uncertainty in the design of the final product and how to best achieve the customer’s requirements. Conversations throughout the sales process may also help to qualify when you’re discussing how to improve on existing products and processes and how to meet the customer’s technical specifications, rather than just providing a quote based on your existing products.
In addition to the product itself, updates to your production process may also qualify. This might include updating templates or layouts, creating specialized tools or making changes to your engineering processes. It can also include trial runs, prototypes and quality checks. The key here is that you’re changing your production facilities to do something new rather than switching between existing configurations.
Distribution may also qualify when you need to update your distribution process for new products. This might range from creating new packaging materials or a way of packaging your product to keep it safe and allow it to maintain quality. Optimizations to improve the speed of delivery could also potentially qualify if needed to maintain product shelf life.
Construction and Real Estate
Construction and real estate activities can also fall under the R&D tax credit when you’re doing something new or improved. While new buildings often have a high degree of customization, activities that go beyond pairing together existing ideas may be able to qualify as experimentation and improvement under the R&D credit. These might include the following:
- Developing processes to build in a hazardous area such as along a seawall;
- Finding ways to mitigate against nearby hazards or nuisances such as industrial activities or unusually bright lighting;
- Meeting new building codes for the first time or developing ways to exceed existing building codes;
- Improving the durability or utility of building components;
- Incorporating new green building techniques; and
- Designing new methods necessary to meet any unique requirements of a project.
In short, if you’re doing something for the first time or in a new way and aren’t copying previous work, you should check to see if your activities qualify for a tax credit.
Natural resources companies may be able to take advantage of the R&D credit for improvements in any stage of the production process. While exploration itself typically doesn’t qualify, improvements to your exploration process, such as the technology you use, should qualify. Anything that improves the safety, efficiency, speed or environmental impact of your drilling or mining process may also be eligible. Cleanup or restoration activities may also qualify if you make similar improvements.
Before the 2018 tax reform, many companies in the natural resources industry were subject to alternative minimum tax and were unable to take advantage of this credit. With corporate AMT repeal, you can now take full advantage of the credit if you otherwise qualify.
Technology and Life Sciences
Technology and life sciences are closely aligned with what most people view as research and development. It’s important to understand, however, that research and development doesn’t just include scientists using test tubes in labs. As with other activities, designing new products or experiments, the work done to understand a problem and what fixes are needed, and refinements needed to reach the finished good or service may all fall under the research and development tax credit. In addition, failed or abandoned research will also typically qualify as long as the activities would have qualified had the research been successful.
Even though transportation companies typically rely on well-established technology, such as trucks and trains, many transportation activities still qualify. The most obvious is direct, physical improvements such as new safety equipment or more efficient engines. New and improved loading equipment or processes can also be eligible. Finally, behind the scenes improvements, such as improved dispatching or routing technology or processes, can also fall under the credit. The trick here is that while small enhancements to existing technology and processes may not seem like innovation at first glance, the fact that you’re trying to solve a problem or improve efficiency should be an indicator that you should further explore the R&D tax credit.
Other Industries and More Information
The R&D tax credit applies to more industries and situations than could ever be covered in a single blog post. If your business’s industry isn’t listed here, there may still be ample opportunity to take advantage of R&D.