Across the globe, countless manufacturing businesses have either been called upon to produce masks, gowns, gloves, and other essential supplies to combat the COVID-19 crisis or have voluntarily answered the cries for help. What public officials have toted as a simple design may very well have required hours of engineering ingenuity to convert existing machinery and equipment to manufacture items such as ventilators, masks, gowns, plastic shields, and more.
While companies, both large and small, who have answered these calls were often already in the business of manufacturing, the majority of them are not in the business of producing these items. This bold answer to the pleas of help no doubt required substantial engineering time to resolve uncertainties around how to reprogram countless CNC machines, reconfigure production lines, and successfully produce fully functional, reliable ventilators. With all of this being done in a sterile environment that ensures the safety of workers.
Although the layperson hearing these announcements on the news channels may feel instant relief, there was likely much more to the process of switching from making foam or textile products to personal protective equipment (commonly known as “PPE”), ventilators, hand sanitizers, and other sought after equipment and supplies to combat COVID-19. In other words, it isn’t as simple as pressing a different setting on a machine and the machine turning out N95 masks. The process likely required Product and Process Engineers, Designers, Facilities Engineers, Equipment Operators, and countless other personnel to discuss new manufacturing processes to produce equipment and supplies they likely had not produced previous to COVID-19. These individuals likely reviewed the designs for the new items and identified potential design or manufacturing methodology challenges and integration efficiencies. Further, all of these companies likely experienced some level of uncertainty related to whether they could actually produce these items, and how they could actually produce them given the existing machinery available. This work could qualify for the Research Tax Credit, and the amount claimed could help offset some of the upfront costs.
The R&D Tax Credit incentivizes US-based businesses to keep technical jobs, including manufacturing, in the United States. The Internal Revenue Code sets out a four-part test for qualification for the credit: (1) there must be a new or improved business component undertaken for a permitted purpose; (2) there must be an uncertainty related to design, methodology, or capability; (3) there must be a process of experimentation; and (4) the process must be based in principles of hard or technical sciences.
Any company undertaking the task of producing these essential health supplies likely meets the requirements of the four-part test and may be eligible for tax savings.
DST Advisory Group works with numerous manufacturing companies of all sizes and across all industries. DST personnel are experts in identifying potential tax savings with minimal impact to a company’s day to day operations.