While waiting for the credit freeze to thaw—retrieve tens of thousands or even hundreds of thousands in cash back from the IRS using an underutilized tax credit
There’s no secret that the lack of credit for businesses is hurting our economy and the unemployment situation.
Many companies will just have to wait until the banks begin lending again; however some companies may have an opportunity for a cash windfall to temporarily get them past the credit freeze.
What if you could get cash back with interest from the IRS within 120 days, would that help? What if that extra cash back ranged from the tens of thousands to the hundreds of thousands of dollars? Would that extra cash give you the opportunity to make an investment in equipment or expansion? Or could you use the extra cash for other purposes to help your company?
How is this possible?
Most manufacturing firms are missing out on 5, 6 or 7 figure manufacturing credits. The existing R&D Tax Credit is overlooked because most manufacturers do not understand that their every day activities already qualify for the credits.
And in most cases, neither does your CPA understand because it requires very specialized knowledge and that's why they have never approached you.
It takes a team of specialized tax engineers and IP attorneys to understand which activities qualify and to create the documentation to substantiate those qualifying activities.
Traditional Definition of R&D
Most people that we speak with conjure up the traditional definition of R&D; people in lab coats tinkering with chemicals, ultra high tech industries and Fortune 500 type companies.
The definition that was adopted by the IRS in 2001 is substantially broader, and the changes were so major they virtually encompass every manufacturing or technology company in some form or fashion.
That is because on a day to day basis manufacturing companies across the country are designing new products. If not, they are improving existing products or alternatively, they are coming up with new processes or, making improvements to the existing processes by which they make those products. And most of them do not have an R&D department and they’re not doing this with the thought in mind that they are performing R&D they are doing it just to stay competitive in their respective industries. And again that is the type of activity that the government is seeking to reward with the R&D Tax Credit.
How Does This Apply to the Food Manufacturing Industry?
Here are some of the everyday activities that would qualify for the credit:
- Developing a packaging to extend product shelf-life
- Improving the manufacturing process to be more efficient
- Determining different ingredients to help preserve food
- Considering different parameters or processes to cook the food
- Determining methods to decrease food spoilage
- Manufacturing efficiency—i.e. utilizing as much packaging in each product as possible to reduce waste
- Automation of manual processes
- Traceability—track each and every ingredient that goes into product to ensure customer safety
The R&D Tax Credit is a wage-based credit and if you take into account that all of the above activities qualify and that supporting and supervising activities may also qualify, the credit can be substantial.
Why do you get cash back?
The IRS recently changed the rules allowing companies to go back 3 open tax years and take the credits they missed. One hundred twenty days after submitting amended returns, you will get cash back with interest. And of course you can take credits for current and future years if you continue to perform similar activities.
Should my company take a look at this?
By the very nature of your business, most food manufacturing companies have qualifying activities.
The question is can you actually use them.
To help, if you can answer yes to all of these items, then you definitely need to have an R&D Tax Consulting firm provide you with a free estimate of your tax credits.
1) Were you profitable in 2006, 2007, 2008 and/or 2009?
2) Is the average annual payroll for 2006, 2007 and 2008 in excess of $2.5 million?
3) Is the company structure a C Corp? If so, you are OK. If an S Corp or partnership, do you have 5 or less shareholders? If so, you are OK.
If you answered yes to those 3 items, then you have an excellent possibility of having a high 5 figure credit and into the 6 or 7 figure credits for companies with larger payrolls.
As mentioned before, the R&D Tax Credit is a wage based credit so the higher your total wages, the higher your credits.
Think about what your company can do with the extra cash in about 120 days.
Some Example Credits
Average Annual Payroll of $3.5 Million
Net Credit Benefit for 2005 through 2008 tax years: $200,000
Average Annual Payroll of $19.5 Million
Net Credit Benefit for 2005 through 2008 tax years: $1,200,000
Average Annual Payroll of $6.5 Million
Net Credit Benefit for 2005 through 2008 tax years: $500,000
Average Annual Payroll of $11.5 Million
Net Credit Benefit for 2005 through 2008 tax years: $700,000
In summary, the current credit crunch is hurting companies trying to expand. You can decide to wait until the banks begin lending again or you can choose to take advantage of an existing tax credit to bring in needed cash fairly quickly. Even if credit becomes more readily available, you should still look into this great tax incentive because you’ll be getting back money from the IRS that you have been overpaying in taxes the last 3 years and going forward as well.
Seek out an R&D Tax Consulting firm to determine if you qualify and to give you an estimate of your R&D Tax Credits. The sooner you do this, the sooner you'll have additional funds to invest in your company.
The authors are Zee Makhani, a Senior Engineering Director and Mark Lauber, VP of Marketing both of Paradigm Partners. Paradigm Partners is a national tax consulting firm specializing in niche tax services such as the R&D Tax Credit, the IC-DISC (U.S. Exporters' Tax Incentive), WOTC (Federal and State Hiring Tax Incentives), Section 179 and Cost Segregation. Mark's email is MLauber@ParadigmLP.com and his phone number is (281) 558-7100 X-105. Our website is www.ParadigmLP.com.