Case Study – R&D – Manufacturing

Fourth-generation Contract Manufacturer Modernizes Accounting, Applies for R&D Tax Credits for Manufacturing

PM Business Advisors Navigates Complex Process for Results Beyond Expectations

The Issues

It is never too late for a qualified company to apply for and claim R&D tax credits. However, many companies are unaware of these lucrative credits – that their business activities qualify for credits or that their state, in addition to the federal government, offers them.

A case in point is an injection molding company that researches, develops, manufactures, and distributes custom made supplies for major industrial clients. The company is a contract manufacturer that, through its research and development initiatives, provides its clients with ongoing product innovation and manufacturing process improvements.

The company is based in the U.S. Midwest and also maintains some operations abroad. The private, family-owned firm has grown and succeeded through four generations.

The current management is led by siblings who inherited the business from generation three. Their business strategy involved updating operations, including their fabrication, application and analytics laboratories, and their manufacturing facilities, as well as modernizing their financial and accounting processes, which had been handled until then by a small, local firm.

Management hired a controller, the company’s first full-time financial professional, and sought a larger accounting firm with more sophisticated, multi-national capabilities. The new controller had previous experience with firms that qualified for R&D tax credits and conferred with the new accounting firm, which concurred that the company might qualify. They had worked with PM Business Advisors (PMBA) on other client engagements and recommended the firm.

The controller’s only concern was that they might be too small a client for PMBA. He was aware of its national presence and that it serves Fortune 500 and 100 clients. He had heard Peter J. Scalise, head of PM Business Advisors National R&D Tax Credit Practice, speak at conferences and present accredited courses for the CPA firm community.

His concern proved unfounded. PMBA was pleased to engage with the company to explore its qualifications to apply for credits.

The Work

Peter J. Scalise and his engagement team traveled to the client’s headquarters to gain first-hand knowledge of its operations to determine the applicability of the federal level and multi-state level R&D tax credit programs.

On December 18, 2015, The Protecting Americans from Tax Hikes (PATH) Act was signed into law. The act made the Research and Development Tax Credit permanent for the first time in its 34-year history. The credit is permanent for costs related to qualified activity incurred after December 31, 2014. Among other industries it covered manufacturers and eliminated the Alternative Minimum Tax (AMT) floor that had previously precluded eligible small firms ($50 million or less in average gross revenues for the prior three years) from taking advantage of the credits.

The specific qualifications for contract manufacturing are onerous and arduous. It requires a subject matter expert with the proper experience and expertise to determine that a contract manufacturer’s activities are indeed qualified R&D activities.

The client also potentially qualified for its state’s R&D Tax Credit. This required an even more impeccable process to identify qualified activities. First-time applications can trigger audits. This reality makes it imperative that the R&D tax credit specialist build in the ability to defend the credits in an audit situation.

The Results/Benefits

A number of the company’s activities were deemed eligible and PMBA worked with management on both its federal and state R&D Tax credit claims. The company was awarded tax credits far beyond its initial expectations. Indeed though, the state initiated an audit. PMBA supported the client throughout a six-month audit process within its original fee structure, at no additional cost.

Although PMBA suggested it would support the company in tax court, the client decided to settle the audit as the result was approximately 90 cents to the dollar. The credit still greatly exceeded its initial expectations. Now with its qualifications established, the firm has an ongoing R&D tax credit strategy that is contributing to its growth plans.

According to the company’s controller, “As a smaller client, the degree of service we were provided by PMBA — especially when defending their work — was incredible. It was a full-throated, top gun defense. In fact, Peter Scalise quoted the state statute verbatim in conversations with the auditor and placed our activities in the context of the regulations. It was impressive. We never felt that it was too much of an imposition for PMBA to go the extra mile.”

To determine your manufacturing or contract manufacturing firm’s qualifications for federal and multi-state R&D tax credits contact the PMBA National R&D Tax Credit Services team at R&Dincentives@PMbusinessadvisors.com. To learn more about PM Business Advisors National R&D Tax Credit Service for manufacturing and other industries and to see whether your state offers credits click here

It’s never too late!

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