A catalyst for profitability: R&D tax credits for chemical engineers

0
61

Do you know that the federal government and many state governments will financially reward your clients for research and development (R&D) activities related to chemical engineering?

It is true. R&D tax credits are federal and state tax incentives designed to encourage innovation, technical design, and product development and enhancement. They are an economic stimulus intended to keep the US on the forefront of innovation.

These tax credits reward owners and companies that develop new products, processes, or inventions and offer a significant percentage back to the owner or company for qualified research activities and qualified research expenses.

The R&D tax credit allows companies to realize tax savings, increase cash flow, and stay competitive in the marketplace. In fact, most qualifying activities are considered day-to-day operations in many industries. The problem is that many owners and companies are unaware they are eligible for the credit.

The R&D tax credit can provide a hidden, but immediate source of cash for your clients from prior years, and it can significantly reduce their current and future year’s federal and state tax liabilities.

Why are R&D tax credits important to the chemical engineering industry?

Many chemical engineers and chemical engineering companies simply do not realize that substantial tax credits are available to them or they do not understand which activities qualify.

To qualify, your client no longer needs to develop a product or process that is new to its industry; it only needs to be new to their company. Many of their normal day-to-day activities include elements of R&D, and chemical engineering companies can qualify for significant tax benefits simply by claiming these credits.

How does your client qualify for R&D tax credits?

Your client must pass this simple four-part IRS test to determine which activities constitute qualified research:

No. 1 — Permitted Purpose/Business Component

The activities must relate to new or improved business components, function, performance, reliability, and quality. Under IRS rules, the business components include a product, process, technique, invention, formula or software.

No. 2 — Technological in Nature

The activity performed must fundamentally rely on the principles of physical or biological science, engineering, or computer science. It is useful to know that these three principles can cross into many industries and most certainly into chemical engineers’ activities.

No. 3 — Elimination of Uncertainty

There needs to be some uncertainty at the onset of an activity when the company is trying to develop a new or improved business component. But there only needs to be uncertainty regarding one of three things:

  1. Can they do it?
  2. How would they do it?
  3. What is the ultimate or appropriate design of what they are trying to develop?

In other words, the activity must be intended to discover information to eliminate uncertainty concerning the capability, method, or design for developing or improving a product or process.

No. 4 — Process of Experimentation

The company needs to evaluate different alternatives when trying to develop a new or improved business component. This may include modeling, simulation or a systematic trial-and-error methodology.

What types of expenses qualify for the R&D tax credit?

Three areas of expense can qualify as R&D expenses:

  • Employee wages — W-2 wages for employees involved in R&D related activities
  • Supplies — The cost of supplies consumed or used in the R&D process
  • 1099 contractor expenses — The cost of contractors used in support of R&D-related activities

How does your client apply for the credit?

Last year, the IRS made its reporting and record-keeping requirements for R&D tax credits much, much stricter, and more complex. As a result, if your client needs an R&D tax credit study, it is important to work with a firm that has both engineering and accounting capabilities, can provide the technical study, assist with your R&D tax credit application and claims processing, and then back it up if there is ever an audit.

Finally, it is important to note that your clients can claim the credit for the current tax year and for three prior tax years. Essentially, your client could receive four years’ benefit the first time you use the R&D credit.