How the R&D tax credit can benefit control system and process engineers
It’s not often a company’s day-to-day services can lead to tax relief, but that’s the case for control system and process engineers.
Designing and implementing systems that function efficiently is the main priority for these engineers. In order to do so, system enhancements continuously need to be developed, which more often than not means one thing: spending money.
The types of technical enhancements that embody an engineer’s daily work activities are exactly what the research and development (R&D) tax credit, which brings in an estimated $10 billion annually for U.S. businesses, was created to spur.
Companies that take advantage of the incentive are able to leverage the amounts claimed to reinvest in their own innovations, and keep pace with their field of competition.
As industries further integrate new systems, like audio/video (A/V), continue to experience growth, and as automation continues to mold the landscape of industries across the board, the need for cost savings is an absolute necessity for control system and process engineers looking to invest in newer, more capable systems.
Complexities turned into credits
Projects involving automation and system communications are becoming more complex, and the trends of staff downsizing do not help. This leaves engineers to create more innovative solutions. As new technologies are condensed and require a direct connection with legacy systems, and as work processes become more streamlined, the innovations brought forward by engineers are more than likely to qualify for the R&D credit.
Although the R&D credit is underused by many industries, system integrators have claimed approximately $246 million in overall credits. Furthermore, more than $22 million in tax credits and incentives have been claimed for 52 National Systems Contractors Association members since 2002.
Companies shouldn’t operate under the false assumption the credit is only for companies that don lab coats and work with test tubes. This couldn’t be further from the truth. There is no need for innovations to be technical or even complicated to qualify for the credit. There also doesn’t need to be a heavy engineering presence during the design, testing, or implementation process.
From manufacturing to robotics or oil & gas extraction, it’s hard to find an industry involving control systems the R&D credit couldn’t apply to. The cross-disciplined, technical nature of the work done by system integration companies make them some of the best candidates for the credit, which has saved American businesses billions of dollars.
An innovative purpose
On a historical note, the R&D credit was designed to spur innovation by rewarding businesses that keep technical jobs in the U.S. To qualify for the R&D credit, a company needs to invest time, money, and resources into the advancement or improvement of one of its products or processes.
The R&D credit allows for a percentage of qualified research expenditures that are directly associated with qualified research activities. Some applicable activities that would qualify for a control system or process engineer include:
- Developing schematic drawings for the integration of system components.
- Performing evaluations and system tests to ensure optimal functionality.
- System operation sequencing.
- Control system programming.
- Implementing automated systems such as programmable logic controllers (PLCs), human-machine interfaces (HMIs), information systems, motion/process control, robotics, radio frequency identification (RFID), and 3-D laser scanning.
Legislative changes, including the 2015 PATH Act, not only made the credit permanent, but also expanded the availability of the incentive. For example, businesses with less than $50 million in gross receipts are now able to claim the credit against their alternative minimum tax (AMT).
Knowing when you qualify
Again, these activities relate to the primary function and principles behind control systems and process engineering. Efforts to fit technology into a confined space, validation tests, the creation of custom applications, determining what combination of catalogs will create custom applications, and the testing of system communications need to be thought of when considering the credit.
For example, an aerospace engineering firm that designs avionics and sensory packages was able to scale its business and R&D activities behind ground tests and simulators, leading to an increase of claimed credits from $250,000 in one year to $1 million the following two years—all of which had the potential to be reinvested in the company.
Such a dramatic increase came from a more analytical look into not just time spent on research projects, but also the inclusion of activities the company hadn’t realized qualified in previous years.
However, the credit isn’t just for engineers who are working with technologies that are “mainstream” or that the public sees as “fashionable.” Take a company that deals with wastewater treatment controls. Its day-to-day activities include the design and implementation of how to treat and distribute water.
Government regulations forced the company to create innovative solutions to match requirements of water input/output chemistry. While the regulations created challenges, the required R&D to remain compliant generated thousands of dollars in credits.
Regulations can generate funds
This, for some, highlights an undermentioned benefit behind government regulations. It should be noted by companies that work in highly-regulated industries and are working to improve systems in order to meet new or heightened standards.
The R&D credit shouldn’t be a blind spot for any control system company. The credit is more accessible than ever and competition within the American marketplace continues to intensify, creating the need for companies to hold onto any penny they can.
Companies whose business practices rely on innovation should consider the credit if they haven’t already done so. The power behind the credit will only further enhance company innovations, as well as their contributions to the American economy.
Tracy Lustyan is a managing director for alliantgroup and is based in the Chicago office. Since 2010, she has partnered with more than 120 CPA firms to uncover significant tax savings for clients in the Midwest and Great Lakes region. Edited by Jack Smith, content manager, Control Engineering, CFE Media, email@example.com.
KEYWORDS: R&D, tax credit
The types of technical enhancements that embody an engineer’s daily work activities are what the R&D tax credit was created to spur.
As new technologies are condensed and require a direct connection with legacy systems, the innovations brought forward by engineers are more than likely to qualify for the R&D credit.
Companies whose business practices rely on innovation should consider the credit if they haven’t already done so.
Does your company qualify for the R&D tax credit?