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How the Research Tax Credit can help Non-Medical Companies that are Aiming to Produce Emergency Medical Equipment

By April 27, 2020

Due to the rise of Coronavirus, American businesses and families are facing troubling times as we struggle to determine what the world will look like as we navigate through this pandemic. Now, perhaps more than ever, companies and individuals are searching for creative ways to maintain operations, innovate, and adapt to ever-present uncertainty in our daily lives.

During the 1940s, America was facing similar circumstances. A loss of customers, a reduced workforce, and strained supply chains as a result of World War II. Similar to the efforts of domestic industry during the War, American companies are retooling to support this new war effort. Unlike the 1940s, instead of producing aircraft, tanks, and ammunition; companies are making emergency medical equipment to support our new people on the front lines, America’s healthcare workers.

A mass mobilization of efforts to produce masks, ventilators, PPE, and various other medical supplies are rapidly deploying across America as demand surges from coast to coast. Businesses from many different sectors are swiftly changing their production lines and manufacturing processes to produce supplies that our country desperately needs.

  • Distilleries and breweries of all sizes are producing hand sanitizer
  • Automotive OEMs and Suppliers are working to produce ventilators
  • Clothing and textile companies have come together to build a supply chain virtually overnight and fast-track the manufacturing of medical face masks

The quick and effective change in focus requires engineering efforts, in regard to products, processes and industrial engineering to implement the changeover to producing emergency medical equipment.

  • Distilleries and Breweries
    • Distilleries distill alcohol to a certain alcohol concentration for making rum, bourbon, etc. To make hand sanitizers, they must distill to a higher concentration ethanol along with adding some emulsifier agent (such as Xanthan gum) to make it thicker rather than a liquid.
    • Packaging this product into a user-friendly bottle or container may require temporary or removable modifications to conveyor belts, filling nozzles or handling equipment (like grippers or wheels).
  • Automotive OEMs and Suppliers
    • These companies will need to produce essential components required for assembly. This can take the shape of fixtures, dies, hand tools, or a more automated solution like a robotic assembly cell.
    • These companies will also need to create manufacturing instructions, solidify their supply chain for the required components, and retrofit the assembly process in a way that it is in control to reduce the number of defects and scrap generated.
    • Theoretically, a factory could be retooled for anything, but there will be limitations like facility space, availability of capital equipment, pneumatic, and power considerations which must have engineering solutions to overcome.
  • Clothing and Textile Companies
    • Identifying the correct process for the binding machine to attach the elastic to the masks and securing the Binding machines themselves (typically manufactured overseas and imported to the United States).
    • Options to conserve the material that goes into the item and design a reusable textile mask or gown (e.g. polypropylene filter component that can be changed out in lieu of tossing the entire mask).

As with any retooling effort, a significant amount of R&D activity is required to accomplish the design, build, and launch of a new product line. As we are seeing today, many companies are expanding operations well outside of their typical scope of operations.

The rapid response by American businesses to retool and produce equipment and supplies to support the fight against Coronavirus presents a strong Research Tax Credit opportunity. 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. Qualified expenses are labor, material/supply costs, and third-party contractor costs.

Typically, retooling and launch activities are an in-depth and well-planned activity that can take years to fully execute depending on the complexity of components and assemblies. To accomplish such tasks, in an extremely reduced timeline, companies are expanding boundaries and pushing the limits of their capabilities to redesign and retool facilities and production lines to produce non-standard components for medical equipment. In addition to labor, capital projects and component costs that are associated with these retooling efforts can be included as qualified research expenses, which can substantially increase the annual credit amount in the year those costs were incurred.