How do industrial manufacturing businesses today gain a competitive edge over their rivals? The answer lies in leveraging advanced technologies such as 3D printing, robotics, AI, and Data analytics. While these new technologies bring various benefits, they also require companies to invest significant resources in improving them. As a result, manufacturing businesses often hesitate to adopt them due to a lack of funds, expertise, or time constraints.
This is where the government comes in. By offering tax credits, incentives, and other financial support schemes, governments aim to encourage private sector investments in research and development projects. The objective is to give industrial manufacturing businesses a reason to spend on R&D instead of marketing expenses. If successful, the scheme should enable these firms to innovate faster, improving their competitiveness against foreign competitors who don’t receive similar benefits.
Reasons for R&D Incentives and Credits
Helps to Improve the Economy
The U.S. still has a considerable number of unemployed people(currently standing at about 5 million). Without government assistance, these people cannot afford rent, food, and other necessities. This leads to less demand for goods and services. It also means that businesses have fewer customers to sell their products to. If they can’t find enough customers, then they will not be able to afford to hire new employees or expand their business.
In addition, if companies like those offering industrial equipment rentals, don’t get enough money from sales, they won’t be able to invest in research and development. Research and Development (R&D) is an investment that requires time and money. Without this investment, companies cannot grow and develop into more efficient and productive organizations. Therefore, by providing tax incentives for R&D, the government can help to stimulate the economy and create more jobs.
It Allows Businesses to Stay Competitive
Industrial manufacturing businesses must constantly improve their products and services to remain profitable. However, many times, these improvements require additional funding. For example, when a manufacturer like Dynatorque wants to make changes to its product line, it may need to test further how well the change works.
Companies often use R&D funds to pay for these types of tests. By offering tax incentives, the government provides businesses with financial assistance to cover some of these costs. Since the government is helping out, businesses can continue to innovate without worrying about paying for the expenses themselves.
It Helps to Create Better Products
When heavy equipment rental companies spend money on R&D, they are investing in improving their current products as well as creating completely new ones. These new products could lead to technological advancements that would allow them to become even more successful than before.
For example, let’s say that a certain car manufacturer spends $100 million on R&D each year. They might come up with a new engine design that increases fuel efficiency by 10 percent. Not only does this mean that the company saves 10 million dollars annually, but it also means that they now have a more efficient vehicle.
It Encourages Innovation
Innovation is one of the most important aspects of any business. Whether it is developing a new product or coming up with a new way to do something, businesses should always look for ways to improve their operations. One way to do this is through R&D. Many companies spend a lot of time and resources trying to think of different ways to improve their processes. Through R&D, they can test out these ideas and see what actually works best.
It Creates a Healthier Environment
As previously mentioned, R&D takes time and money. If companies aren’t willing to put those resources towards R&D, then they won’t be able to keep up with the competition. Furthermore, if manufacturing companies, like hose producing industrial long weld neck flanges, don’t invest in R&D, then it will be harder for them to come up with innovative solutions to problems. Because of this, they won’t know how to solve issues such as pollution and global warming.
How Manufacturers Benefit From R&D Incentives and Credits
There are several benefits that come with the use of R&D credits, and they can be used in many different ways to help save money on taxes.
Industrial Manufacturing Businesses Can Reduce Their Taxable Income
If you have an itemized tax return, you will want to make sure that you take advantage of all the deductions you qualify for. One way to do this would be to use R&D credits.
It Deducts Certain Types of Business Expenses
For example, you can deduct the cost of materials that you buy for your company. You can also deduct the cost of supplies that you need to run your business.
It Reduces the Corporate Tax Rate
This happens because when you use these credits, you can deduct the amount you spent on R&D. This means that you can effectively lower your taxable income by taking out the portion of the expense that was paid towards R&D.
It Allows Industrial Manufacturing Businesses to Keep More of What They Earn
When you use R&D credits, you can increase the value of your business. This means you can sell your business for more than what you originally bought.
Manufacturing Activities That Qualify for R&D Credits
The following activities will be considered eligible for the Research and Development (R&D) incentive
The development of a new product or process, including the modification of existing products or processes to improve their performance, quality, safety, or cost-effectiveness
- The development of an improved method for manufacturing a product
- The improvement in the efficiency of production of any chemical, pharmaceutical, food, agricultural, or other industrial product
- The development of equipment, facilities, methods, techniques, or technologies used in research and development
Activities That Don’t Qualify
The following activities are not eligible for the R&D incentive
Any activity related to the acquisition, manufacture, assembly, distribution, sale, lease, storage, use, or disposal of goods or services
- The purchase of supplies, materials, vehicles, or real property
- The provision of consulting services, except those provided as part of a formal course of study
- The preparation or filing of patent applications or registration of trademarks or service marks
If you’re looking to start using R&D credits, then you should consider starting small. Try to think of one thing you could change about your business to boost profits. Then try to implement that idea. Once you’ve done that, you’ll be well on your way to saving money through R&D credits.
Factors Influencing Spending for R&D
The Size of a Company’s Market Share
If a company, like those dealing in fork lifts, has a large market share, it can afford to spend more on R&D than companies with smaller shares because they have fewer competitors. Industrial manufacturing businesses with larger market shares also tend to raise prices more easily than those with smaller shares.
A Company’s Ability to Obtain Patents
Patent protection gives industrial manufacturing businesses exclusive rights to their products or processes, which allows them to charge higher prices for their goods and services.
These regulations may affect how much a company spends on R&D by setting minimum standards for safety and quality. For example, if a government requires all industrial metal fabrication companies to meet certain health requirements, then industrial manufacturing businesses will need to invest more resources into improving the quality of their products.
A Company’s Level of Innovation
Innovative companies usually develop new products or processes that are not yet available from other companies. These innovative products often require extensive testing before they can be marketed. Because these products are so different from existing ones, they may cost more to make and sell.
The Amount of Competition in an Industry
Some industrial manufacturing businesses, such as pharmaceuticals, are very competitive. Therefore, companies must spend a lot of time and effort trying to differentiate themselves from their rivals. Other industries, such as computers, have few competitors; thus, companies do not have to spend as much time and money trying to distinguish themselves from others.
Examples of Equipment That May Qualify for Credits
Industrial welding machines are considered eligible for research & development credits, provided they were used exclusively for R&D purposes. However, keeping track of all expenses related to machine maintenance, repairs, and fuel supply is important, because these costs cannot be claimed as R&D credits.
The qualifying amount for industrial welders depends on the size of the machine. If the welding machine has a capacity greater than $15,000, then it qualifies for 50% of the manufacturing costs of new prototypes up to $75,000. After that point, only 10% of the manufacturing costs are eligible for tax credits.
Snow removal equipment qualifies under the Small Business Innovation Research Program (SBIR), which provides financial assistance from the government to help develop new technological innovations for businesses, and the Advanced Technology Vehicle Manufacturing Tax Credit (ATVMTC). If you purchase such equipment after January 1, 2011, you can claim a 30% property tax deduction plus up to $2,500 per item of qualifying equipment. If you qualify, the amount of money you receive depends on how much was invested and how long the project lasted.
Other Heavy Equipment
Heavy-duty equipment such as machines or vehicles used for research purposes may be eligible for Research & Development tax credits in some states. The heavy equipment includes everything from cranes to forklifts, conveyors, excavators, backhoes, loaders, track hogs, construction vehicles, dump trucks, and anything else that moves. The IRS allows up to 75% of qualified costs to count towards research & development. These tax benefits vary from state to state. Contact your local sales representative to determine eligibility.
How to Claim Credits
If industrial manufacturing businesses want to claim R&D credit for their work, then it needs to meet certain criteria. These include the following;
The Work Must Have Been Carried Out Using Resources Provided by the Organization Funding Your Work
Suppose you are doing your own research and development without having access to any of the resources provided by the organization funding your project. In that case, you cannot claim R&D credit. If you are carrying out a project using the resources provided by another organization, then you may still be able to claim R&D credits even though you haven’t used them. However, you should check with the person who provides the funds to see whether this is possible before you start your project.
You Must Have Used Those Resources to Carry Out the Work
If your project doesn’t involve any new technology, ideas, or processes, then you won’t be able to claim R & D credits for it. A good example of this would be if you were designing forklift rentals. You might design the forklift, but you wouldn’t be able to claim R&D credit because there isn’t really anything new about it.
Your Work Must Have Had an Effect on How People Live Their Lives Now
If the organizations funding your project don’t know about your work when you finish it, then you can’t claim R & D credit for it. This would mean you would need to get someone else to tell them about it so you can claim R&D credits for it.
Documentation Required for Incentives and Credits
A completed Form 8822, Research and Development Expense Deduction Certificate, with an original signature from the taxpayer or a duly authorized representative
An invoice, receipt, purchase order, contract, or other document evidencing the expenditure by the taxpayer of $25,000 or more during the taxable year on qualifying research and development expenses
Copies of any agreements between the taxpayer and its suppliers, subcontractors, or agents concerning payment for goods or services provided to the taxpayer for use in connection with qualifying research and development activities
If the taxpayer owns real property used in connection with qualifying research activity, a copy of the lease agreement
For taxpayers who are not corporations, a statement signed under penalties of perjury showing their ownership interest, if any, in the corporation claiming the credit
Now you know how industrial manufacturing businesses can make the most of research and development incentives and credits. The best thing about it is that they are not only able to use them in a way that will benefit their business but also in a way that will help them become more competitive.