Federal R&D Tax Credit Program Helps Coatings Industry in Tight Economy
January 1, 2009
With the current state of the economy, companies within the coatings industry are looking at every avenue to increase their cash flow and thus their bottom line. Countless companies in the industry have recognized the value in pursuing the Research and Development (R&D) Tax Credit, which has become a financial windfall for many. This R&D Tax Credit is based on the innovative activities conducted by the companies within the industry.
One of the main drivers within the coating’s industry is innovation. What may be news to many is that companies of all sizes creating that innovation are eligible for substantial tax relief under the Research and Development Tax Credit Program.
It may also be news to most companies that they do not have to be a large, multi-national conglomerate to take advantage of the program; numerous small and mid-sized companies are taking full advantage of the credit. In the tax world, R&D is defined much more broadly than in scientific circles. Research that qualifies companies for the R&D Tax Credit Program includes much more than new product development alone.
Expenditures taken to improve existing products as well as to develop or improve processes also qualify. In short, a company’s day-to-day operations may qualify them for this benefit. This is further illustrated by the fact that a vast number of companies miss out on the R&D Tax Credit due to their belief that their daily operations would not qualify, while clearly they would.
Support from NAMIn a November 2007 letter to the U.S. Speaker of the House, the National Association of Manufacturers (NAM) described the Federal R&D tax credit as “a proven incentive for additional research and development, with each federal credit dollar generating one additional dollar of business R&D. NAM went on to say that this year’s extension of the credit will benefit the more than 11,000 companies that use it and provide certainty to businesses trying to budget R&D costs.
Coatings Companies are Likely ParticipantsPersonnel from Affluent Consulting of Tampa, FL, have recognized that the coatings industry represents a significant segment of companies likely to have expenditures that would qualify for the R&D Tax Credit Program. Affluent works with clients to identify those R&D expenditures and file amended tax returns for as many as four years, retroactively. Companies can also take advantage of the credit in subsequent years.
Under-Utilized ProgramThe Federal R&D Tax Credit Program has been in existence since 1981, but was utilized by only the most technologically sophisticated companies until 2001. That year, U.S. tax laws were redefined to create lucrative new incentives for companies who continued to innovate, allowing a much greater number of companies to qualify for the R&D tax credit.
Seven years later, most eligible companies still do not take full advantage of this opportunity and continue to pay billions of dollars to the U.S. government even though their R&D efforts qualify them for these substantial, annual credits.
In many instances, even a company’s accountant or CPA firm may miss significant tax saving opportunities because the process is still not simple. Due to the complexity of U.S. tax statutes, it often takes very careful examination of regulations, case law, rulings and treatises by subject matter experts to navigate the system and successfully uncover and capture all qualifying research.
The roadblocks to claiming these R&D tax credits include lack of awareness and the time required to document a company’s eligibility for them. Many companies fail to take advantage of the R&D tax credit because they define research and development as a clear black and white definition. In actual fact, the Internal Revenue Service views research and development as extremely broad, thus opening up the potential for countless businesses in the coatings industry to take advantage of the R&D Tax Credit.
Billions Awarded to Only a Fraction of Those EligibleIt is estimated that over $8 billion in R&D tax credits are awarded annually to qualified companies in the United States. Yet, the IRS estimates that a mere 20% of companies who would have qualified have taken advantage of this program that was designed to encourage innovation.
Due to the strong emphasis on innovation through R&D within the coatings industry, there are many activities and expenditures that will qualify companies for the R&D tax credit. Many of those activities are easily identified as R&D expenditures and thus would qualify. Among these, a small number of examples include:
•Process improvements intended for greater efficiency and cost effectiveness;
•Custom or “in-house” software development specific to a company’s internal needs;
•New materials evaluation and selection including various types of finishing; and
•Physical/chemical testing to evaluate coating performance.
This list is a small percentage of qualifying examples. For a more comprehensive list of qualifying activities, visit www.Affluent-Consulting.com.
Seek Professional HelpWhile it is clear that the R&D Tax Credit Program is significantly under-utilized, companies who have never tried to document their eligible R&D expenditures are cautioned to seek professional assistance. For most companies, a thorough process is in order. This process typically involves several stages or phases:
•Preliminary identification – to determine if any expenditures are likely to be identified;
•Qualitative assessment – to determine the types of expenditures for a company;
•Quantitative assessment – to determine the estimated value of qualifying expenditures; and
•Reporting – to create a detailed report on all of a company’s R&D expenditures that qualify for Federal tax credits.
By taking the time to go through these four phases of the process with a qualified, experienced consultant, coating industry companies can maximize the value of the R&D credits they will be able to claim with the knowledge that they’ve created a thorough and comprehensive paper trail to prove the authenticity of the expenditures.
Documentation and Amended ReturnsThe final aspect of the reporting phase typically includes preparation of the required amended federal income tax returns and an R&D study. For coatings companies, the financial benefits of conducting R&D tax credit studies are immense and may include:
• Significant federal tax credits;
• Additional tax savings in future years;
• Increased cash flow for companies;
• Lower effective tax rates; and
• Creating a methodology for use in future tax years.
Coating Industry Well-Suited for the R&D Credit ProgramThe coatings industry was founded on innovation, research and development. The replacement of traditional solvent-based finishing with waterborne, high-solids, UV and powder coatings in order to provide improved results and cost savings is its sustaining lifeblood. The importance of R&D has been recognized and rewarded in the United States for over a quarter of a century through the Federal R&D Credit Program.
Coatings companies are positioned well to take advantage of this program and to maximize their tax savings for multiple years in the past and going forward. At a time when profit margins are being squeezed from every direction due to the slowing of the economy, it makes perfect sense to take advantage of a financial windfall that was designed to reward the very activities that make the industry the success it is today.
For more information on the Federal R&D Tax Credit Program, contact Affluent Consulting at 813/569.7711 or via e-mail at email@example.com or visit www.Affluent-Consulting.com.