Posted by Jeffrey Feingold on 11.22.24

Contrary to popular belief, a company does not have to manufacture an end product to qualify for tax incentives. Companies in the metal fabrication industry develop significant research and development (R&D) processes and process systems—activities that could qualify for valuable federal and state R&D tax credits.

The federal government implemented the Research and Experimentation tax credits in 1981 to create jobs and spur technology in the U.S. Known as R&D tax credits, the credit was made permanent with the Protecting Americans from Tax Hikes (PATH) Act of 2015. The majority of states also offer R&D credit programs.

Qualifying Activities

Despite its name, the R&D tax credit program includes far more activities than research, patents and laboratory work in high-tech, medical and scientific industries. Many metal fabricators don’t have an R&D department, and they don’t consider improvements they are making to remain competitive in their industry as R&D. However, when they use innovative methods to preform, machine and finish metal components, they may be improving engineering practices and introducing new concepts to the fabrication process, both of which are eligible activities for the tax credit.

The R&D credit applies to those who improve the metal fabrication process by making it more advanced, efficient and environmentally friendly. The credit is also intended for activities related to process design and development. Examples include new techniques, formulas, processes, software, and the use of innova­tive materials to create more reliable, energy-efficient products or processes.

Examples of metal fabrication activities that may qualify for R&D tax credits include:

• Developing a more effective welding process
• Designing, developing and testing product prototypes, such as those used for die-cut tooling
• Designing and developing cost-effective operational processes
• Integrating new materials to improve product performance and manufacturing processes
• Testing for alternative materials

Download our free e-book: The Manufacturer's Guide to R&D Tax Credits

Four-Part Test for Eligibility

R&D tax credit eligibility largely depends on wheth­er the work you are conducting meets the criteria established by the IRS in its four-part test:

1. Developing a new or improved business component (The Business Component Test): The research’s purpose must be to create a new or im­proved product or process, resulting in increased performance, function, reliability or quality.
2. The activity is technical in nature: The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology or computer science.
3. Elimination of technical uncertainty: You must demonstrate that you’ve attempted to eliminate uncertainty about the development or improvement of a product or process.
4. Process of experimentation: You must demonstrate – through modeling, simulation, systematic trial and error or other methods – that you’ve evaluated alternatives for achieving the desired result.

Your accountant or qualified R&D tax credit expert can easily help you determine whether your metal fabricating and activities meet the criteria of the test by conducting a tax credit study.

Find Out if Your Activities Qualify

The R&D tax credit can be a lucrative incentive for innovative businesses. Given the new permanent nature of the federal tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving tax credit opportunities.

Request a free assessment to determine qualifying R&D tax credit eligibility.

Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, call us at 800-260-4138 or please leave us a message below.