Posted by Jeffrey Feingold on 07.10.24

The Research and Development tax credits were enacted in 1981 as part of the Economic Recovery Act to spur the U.S. economy and create jobs. It was intended to encourage research among U.S. companies and keep our country strong. Many U.S. companies manufacture overseas. How does this fit into the plan for the R&D tax credits?

What are the R&D tax credits?

The R&D tax credits are the hallmark of the federal government's tax incentives. They keep U.S. innovation strong by providing lucrative tax credits. U.S. research has increased since these were enacted. Some important features are:

• The Research and Development tax credits are a bottom line tax credit against the taxes on company income on the income tax form. It is not a deduction against income. It is subtracted directly from the tax owed. Companies are saving hundreds of thousands of dollars with this tax credit.
• Wages related to the research, supplies for the research, contract research, and basic research payments are all eligible expenses to be used for the credits.
• The credits are available for research in laboratories, new products and patents, improved products, and new processes and procedures or methods of doing things on a company basis. These methods do not have to be new to the industry—only new to the company.

Are U.S. companies that manufacture overseas entitled to credits?

The answer is "It depends". Not all companies qualify for the tax credit. It depends on the type of work being done. Only the part that is research or development related qualifies for the credit. It doesn't matter where the manufacturing is. The important question here is where is the research done. The research must be in the U.S. to qualify for credits. So if a company researches here and manufactures there, it could still qualify.

What does not qualify?

These do not qualify:

• Research on a product that is already in commercial production.
• Duplication or adaptation of existing products.
• Reverse engineering
• Surveys or studies about management
• Market research
• Routine data collection
• Routine quality control
• In-house software development
• Foreign research conducted outside the United States,
• Research related to social sciences, arts, or humanities;
• Funded research from any grant, any contract, or otherwise by another person or governmental entity.

What industries qualify?

Dozens of industries qualify, including

• Engineering Services
• Telecommunications
• Apparel/Textile
• Job Shops (metal fabrication, gears, coatings, HVAC, recycling, etc.)
• Manufacturing
• Medical Devices
• Packaging
• Plastics
• Semiconductor
• Software
• Tool & Die
• and more

Where can you find the answers to your questions?

Talk with a trusted CPA, your tax attorney, or a specialty tax company that deals with the R&D tax credits, like Tax Point Advisors. We will give you a FREE consultation about your eligibility and an estimate of your credits. Don't miss out on an opportunity to increase your bottom line. As long as the design work is done here in the US, manufacturing of this product can occur anywhere, whether the manufacturing is outsourced or the manufacturing company is your own.