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Taking ‘Credit’ For R & D

By Amy Radishofski, Staff Reporter, Manufacturing.netResearch and Development is an essential aspect of remaining competitive in today’s constantly changing manufacturing environment. Utilizing tax credits can help R&D payoff in more ways than one.

Manufacturing is about innovation. From going global to going lean, companies are changing and evolving their operations frequently. Much of that change falls under Research and Development (R&D).
But research can be risky, with only one out of every 125 projects resulting in a successful commercial product, according to the National Association of Manufacturers (NAM). It can also be costly.
Currently, companies can apply for an R&D tax credit. This credit gives companies cash that can go towards things like equipment or wages for those performing the R&D.
While there are about 11,000 companies using the tax credit, there are those who may not know they even qualify for it.
(For information on how to apply and tax tips, click here.)
Bruce Braithwaite, CEO of Braithwaite Global, Inc., says most people tend to think of someone in a white coat in a lab or university when they think of R&D.
“In manufacturing, it’s on the shop floor, developing products and processes,” he said. “They do it every day.”
Braithwaite suggests companies turn to their scientists or engineers instead of their accountants to determine what is covered under the tax credit, noting that the credit encourages people to perform R&D and reduce costs.
From 1994-2004, manufacturing productivity rose 60 percent, due in large part to innovation and technological advances.
Manufacturers claimed 70 percent, or $3.8 billion, of R&D tax credits in 2003, according to NAM statistics. Approximately 75 percent of those credit dollars went to wages, with the percentage rising as high as 90 percent in some industries. The remaining percentage goes towards research.
Some of the industry sectors currently using the tax credit include aerospace, agriculture, biotechnology, chemicals, electronics, energy, manufacturing, medical technology and pharmaceuticals.
However, the tax credit may not be around much longer. The Treasury Department is considering the elimination of preferential tax breaks (which includes the R&D credit) and then lowering the corporate tax rate from 35 to 27 percent. The current tax credit is set to expire on December 31, 2007. Congress could choose to extend the credit before then, or it could be extended retroactively.
Since the tax credit was enacted in 1981, it has been extended 12 times, with the extensions lasting between six months and five years. It was last extended in December 2006. It also had a 12 percent alternative simplified credit added to it, as some companies could not qualify for the traditional credit.
Monica McGuire, NAM’s Senior Policy Director, Taxation and Executive Secretary, R&D Credit Coalition, says the government can both lower the rate and keep the R&D credit. She adds that the NAM is pushing for a 12 to 20 percent increase in the credit and for the credit to become permanent.
“R&D planning is 5-10 years,” McGuire said. “Making it permanent means companies won’t have to factor in ‘Will I have it?’ a few years down the road.”
Countries like China, India, France, and Australia are more R&D-friendly than the U.S. in terms of credits and tax breaks. Canada, for example, has a permanent 20 percent flat rate tax credit. In fact, in 2003, foreign-based R&D spending grew at a faster rate than domestic R&D spending.
“It’s a global race for R&D investment dollars,” McGuire commented. “The U.S. is falling behind.”
If a company makes the decision to outsource R&D to a foreign country, the U.S. economy misses out on the high-tech, high-wage jobs and potential process or technology advances.
Some companies, however, don’t have the option to move offshore. If the research is specific to a product here, U.S. specialists would know best, thus necessitating domestic R&D and the associated tax credits.
“R&D is pivotal,” added McGuire. “You have to have it to enhance, improve and elevate your standard of living.”
“It’s important to invest in innovation and jobs,” said Braithwaite.
The government seems to agree.
McGuire said the movement for a multi-year tax credit has “unprecedented bipartisan support.” The Levin and Camp Investment in America Act of 2007 has 128 co-sponsors and three-quarters of the Ways and Means Committee.
Not only is the tax credit good for manufacturing, it’s good for the economy. From the jobs to the technology advances, the R&D tax credit just makes ‘cents.’