Control and integration companies: 7 ways to qualify for the research and development tax credit
For those who are in the business of improving industrial production processes, be it through controls and automation or through the integration of multiple systems, it is likely that there is an excellent opportunity to bring added value to the company through the research and development (R&D) tax credit.
The R&D tax credit brings in an estimated $10 billion annually for U.S. businesses and has become one of the largest and most generous tax credits out there. Due to the cross-disciplined and technical nature of their work, industrial controls, automation, and systems integration companies are among some of the absolute best candidates for the credit. In some cases, results can save companies money that reaches six figures.
This industry is such a premier candidate for the credit, and changes made as recently as December 2015 will be tremendously beneficial to these companies.
How the R&D tax credit works
Considering the potential total value of the credit, it is surprising that, by and large, the R&D tax credit is actually severely under-claimed by the majority of U.S. businesses. (The Wall Street Journal estimates that only one out of every 20 eligible businesses is claiming the credit.) There are numerous reasons for this, but in general, a misunderstanding of what the federal government defines as "research and development" tends to be the main culprit.
Despite what the name may imply, the R&D tax credit is not just for clinical trials, patents, or scientists in white lab coats any longer. Rather, in the case of industrial automation and systems integration companies, it is the everyday technical problem solving performed on the factory floor by engineers who are working to improve a product, or updates to iterative steps devised by a plant manager to enhance the efficiency of a systematic process, that can lead to eligibility.
In the case of control engineers, the long hours spent on hardware and software development, or motion control experimentation, for example, will also generally qualify businesses for high-end credit results. Any type of work performed by employees that is intended to design, develop, program, or enhance the efficiency of automated production systems fits perfectly with the kinds of activities the R&D credit rewards.
Tax credit project examples
For example, a company that designs, retrofits, and manufactures custom industrial automation machinery was contracted to conceptualize and manufacture a robotic assembly machine. During the design phase, the team used several 3-D software platforms to simulate and illustrate to the client how the machine would operate. This practice ended up reducing waste and cutting costs. Materials and parts were purchased and assembled while the complex multi-axis motion controls and software were developed simultaneously. This project, in conjunction with other innovative undertakings, helped this company qualify for $242,967 in R&D credits.
In another example, a value-added reseller and systems integrator for industrial automation products discovered that it qualified for $214,106 in R&D credits thanks to the company’s work helping factories engineer and integrate products and technologies. The activities that determined their eligibility for the credit included the assimilation of automation components such as sensors, alarms, motion controllers, wireless communications, and large-scale machine components.
The key takeaway from these examples is that there are many ways to qualify for the R&D tax credit, including (but not limited to) the following seven activities:
1. Everyday techniques and processes that are associated with industrial engineering, programming, and manufacturing are generally ideal fits for the R&D tax credit.
2. Performing interdisciplinary engineering, such as control design and mechatronics, for industrial purposes
3. Resolving unique automation challenges for diverse applications
4. Delivering custom solutions that utilize measurement and data-driven technologies
5. Developing software or hardware for instrumentation
6. Performing evaluations, feasibility studies, and system tests to ensure optimal functionality
7. Programming automated controllers such as industrial PCs, PLCs, and HMIs.
Companies providing a wide span of control, automation, programming functions, and services can be eligible for this opportunity, and it’s not just limited to product engineers or smart manufacturers. The R&D credit reaches across the spectrum of the Industrial Internet of Things (IIoT) to include suppliers and peripheral service providers.
The PATH Act and expanding the R&D tax credit
Working in the favor of American companies, big changes were made this past December when Congress signed the Protecting Americans from Tax Hikes (PATH) Act into law, thereby enacting key modifications that will greatly expand the number of industrial automation and systems integration companies (and for that matter, U.S. businesses as a whole) eligible for the R&D Tax Credit.
The PATH Act made the R&D credit permanent, which provides business owners with a reliable resource for long-term financial planning. Additionally, the law includes a major expansion that will take effect in 2016 by removing the alternative minimum tax (AMT) bar for eligible small businesses (defined by the legislation as businesses with less than $50 million in average gross receipts for the prior 3 years). This is a barrier that effectively prevented qualifying companies from taking advantage of the R&D credit for years, and loosening the rules governing AMT’s limitations has greatly expanded the number of companies eligible for the credit.
Despite being more available than ever, the R&D credit continues to be a blind spot for business owners of industrial automation and systems integration companies. This niche industry is at the top of the list of some of the absolute best credit candidates, and it’s time for business owners to claim they’re fully entitled to tax savings. Ignoring the value of the R&D credit could be among the biggest mistakes a company can make-and considering both congressional changes and the new dynamic trends within the industry itself, it would be wise for these companies to look long and hard at the R&D tax credit.
Tracy Lustyan, managing director, Alliantgroup. Edited by Chris Vavra, production editor, CFE Media, Control Engineering, firstname.lastname@example.org.
About the author
Tracy Lustyan is an expert on the research and development (R&D) tax credit and how it applies to innovative businesses. As a managing director at Alliantgroup, Tracy has partnered with more than 120 CPA firms to uncover significant government-sponsored tax savings for more than 450 companies operating in diverse industries, including manufacturing, systems integration, engineering, and software. For more information about how controls and automation sciences might qualify for the R&D tax credit, contact Tracy at email@example.com.