Fabrication R&D Tax Credit Benefits for Businesses

Fabrication and the R&D Tax Credit

Small fabrication businesses can significantly benefit from the Research and Development tax credit by offsetting costs associated with developing new products, processes, or improving existing ones. This includes activities such as designing new tools, testing materials, and optimizing production methods. Fundamentally, the payroll tax offset for R&D for startups allows eligible companies to apply up to $500,000 of the credit annually against their payroll taxes. This direct reduction in personnel costs provides immediate cash flow relief, allowing startups to reinvest in innovation, hire more talent, and accelerate growth even before becoming profitable.

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Founded in 1984 by J.W. Norris under the name Reed & Co., Swanson Reed has grown to become one of the world’s largest firms specializing in Research and Development (R&D) tax credit consulting. We boast numerous publications. Our artificial intelligence software, TaxTrex, is a state-of-the-art AI language model capable of preparing R&D tax credit claims in just 90 minutes. Our audit insurance policy for R&D credits, creditARMOR, is one of the most cost-effective audit management products on the market.

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Manufacturing Case Study

Business Scenario

This case study demonstrates the application of key legislative requirements for qualifying R&D activities, applied to relevant activities in the manufacturing sector.

For nearly 50 years, Sonny Glass Fabrication has provided quality custom glass and mirror work for every type of job and requirement, both residential and commercial. Sonny Glass Fabrication designs, draws, and installs wall mirrors, entrance mirrors, bathroom and closet mirrors, beveled mirrors, and custom products. The most technically challenging part of their work is the design and fabrication of custom pieces for their clients.

Sonny Glass Fabrication’s R&D activities include the design, fabrication, and installation of custom glass pieces. First, they design the glass to meet their clients’ needs and standards. Once designed, the glass is fabricated and brought to the site for measurements and installation. Very often, once at the project site, further customizations are required due to installation issues.

The activities that Sonny Glass Fabrication performs on its custom jobs are technical in nature. Engineering, design work, prototyping, drawings, and schematics are all necessary to eliminate uncertainty in custom projects.

To qualify for the Research and Development Tax Credit, Sonny Glass Fabrication had to determine the eligibility of its proposed R&D activities. “Qualified research” must meet four main criteria, known and developed by Congress as the Four-Part Test. After collaborating with an R&D tax consulting firm, Sonny Glass Fabrication received a total credit of $87,000 for 4 years of R&D activities. Sonny Glass Fabrication’s qualified R&D activities included the following.

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Eligible R&D Activities of Sonny Glass Fabrication

Design and development of a series of prototypes to achieve technical objectives (design of a custom partition wall).

Sonny Glass Fabrication’s hypothesis for this project questioned whether the custom partition wall could be designed and developed to meet the client’s demands and still function as intended.

Sonny Glass Fabrication procured multiple renderings to examine feasible material applications to achieve the project goals with this non-standard request. They conducted a field survey and layout to examine the environment and adjust the renderings and installation plan.

The experiments conducted by Sonny Glass Fabrication in this phase primarily consisted of conceptual engineering drawings and mathematical calculations. These experiments could only be proven effective or ineffective during the prototype development and testing phase. Following experiments in that phase, during which the product was built and tested, the design was modified and re-tested until the desired result was achieved.

Testing and data analysis to obtain reproducible results to a satisfactory standard (development and testing of the partition wall).

The main objective of this phase was to demonstrate that the theoretical conclusions of the design phase could be realized through the development and testing of the partition wall, and to conclude that a wall could be designed and developed in the desired space and form and function correctly.

Pre-existing materials had to be modified, with ends notched to allow the base hardware to attach to the surface-mounted barrier post, where it originally would not attach. The barrier post also had to be adjusted to facilitate the final rendering.

Sonny Glass Fabrication outsourced structural engineering services for seismic and gravitational analysis of the architectural glass feature, as well as coloring services and the fabrication of signage and lettering.

Background research to assess current knowledge gaps and determine feasibility (background research on product development).

In addition to the lack of comparable solutions available, the results of the activities in this research could not have been known or determined in advance due to a series of specific technical challenges.

Sonny Glass Fabrications undertook background research to determine the feasibility of the project. Eligible R&D activities during this phase included:

Research and literature review, including maintaining up-to-date knowledge of relevant certification and building standards.
Consultation with industry professionals to determine the level of product feasibility.
Preliminary review of equipment and resources regarding capacity, performance, and suitability for the project.
Consultation with key component/part/assembly suppliers to determine the factors they considered important in the design and to understand how the design needed to be structured accordingly.

The background research conducted by Sonny Glass Fabrication was directly related to the main objective of designing and developing a custom piece of glass, thus qualifying as R&D.

Continuous analysis of customer or user feedback to improve prototype design (R&D on partition wall feedback).

Sonny Glass Fabrication’s eligible R&D activity for this phase of its project included:

Analysis and testing to improve the efficiency and safety of future designs.
Continuous development and modification to interpret experimental results and draw conclusions that served as a starting point for the development of new designs and products.

These activities were necessary to evaluate the performance capabilities of the new design in the field and to ameliorate any defects in the design, thus qualifying as R&D.

Live Webinar: The R&D Tax Credit in the Fabrication, Waste Management & Circular Economy Industry

Duration: 60 Minutes

Learning objectives include:

An overview of R&D Tax Credits
Identifying Qualifying Research Activities
Defining the 4-Part Test
How to substantiate activities through documentation
Identifying Qualifying Research Expenses

Cost: FREE

Knowledge Level: Basic*

R&D Tax Credit Training for the Fabrication Industry

directive for LBI taxpayers

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Definition of Qualified Research

Qualified research consists of research with the intent to develop new or improved business components. A business component is defined as any product, process, technique, invention, formula, or software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.

The Four-Part Test

Activities eligible for the R&D Credit are described in the “Four-Part Test,” which must be satisfied for the activity to qualify as R&D.

Permitted Purpose: The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component.
Elimination of Uncertainty: The taxpayer must intend to discover information that would eliminate uncertainty regarding the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, the method of development or improvement, or the appropriateness of the business component’s design.
Process of Experimentation: The taxpayer must undergo a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or method to achieve that result, or the appropriate design of that result, is uncertain at the beginning of the taxpayer’s research activities.
Technological in Nature: The process of experimentation used to discover information must fundamentally rely on the principles of hard sciences such as physical or biological sciences, chemistry, engineering, or computer science.

What specific records and documentation did Sonny Glass Fabrication keep?

Similar to any tax credit or deduction, Sonny Glass Fabrication had to keep business records describing what they did in their R&D activities, including experimental activities and documents to demonstrate that the work took place in a systematic manner. Sonny Glass Fabrication kept the following documentation:

Project logs/notes
Conceptual sketches
Design drawings
Background research
Change logs
Test protocols
Staff timesheets
Tax invoices
Receipts

By having these records on file, Sonny Glass Fabrication confirmed they were “compliance ready,” meaning that if they were subject to an audit, they could present documentation to show the progression of their R&D work, ultimately demonstrating their eligibility for R&D.