Adapting for COVID-19 and the R&D Tax CreditMay 01, 2020
Because of COVID-19, either out of necessity or choice, companies are finding new ways to do business. Don’t forget that your efforts can qualify for the research and development tax credit (R&D).
Companies are finding new ways to do business in the wake of the COVID-19 outbreak, and have introduced many new products and processes as a result. Many are shifting production to fill a gap in the need for medical protective equipment or other virus related supplies. This has many businesses wondering….where does the research and development tax credit fit into the equation? We shed light on R&D tax credit opportunities below, with an exclusive case study from manufacturer, Cooley Group.
What is the R&D tax credit?
The Research & Development (R&D) tax credit is for taxpayers of any size that design, develop or improve products, processes, techniques, formulas, or software. It is calculated on the basis of increases in research activities and expenditures and is intended to reward those that pursue innovation with continually increasing investments.
The R&D Tax Credit allows a federal credit of up to 20 percent of eligible spending for new and improved products and processes. A tax credit is an amount of money that taxpayers are permitted to subtract, dollar for dollar, from the income taxes that they owe. Many states have separate R&D tax credit programs as well.
Qualified research must meet the following four criteria:
- New or improved products, processes, or software
- Technological in nature
- Elimination of uncertainty
- Process of experimentation
Eligible costs include employee wages, cost of supplies, and contract research expenses.
A Real World Example
Before the pandemic hit, Pawtucket, RI-based manufacturer Cooley Group developed and manufactured solutions for the medical industry, supplying Cooley Medguard to hospitals and healthcare providers as a cost-effective replacement for PVC-reinforced membranes and films. When COVID-19 spread throughout the US, hospitals were inundated with patients, urgently increasing demand for medical gowns. Medical gowns (which are typically sourced from China) were backlogged and a locally-produced alternative was required immediately. According to Cooley's Executive Vice President of Sales, David Lunati, hospital's demand for medical gowns was so great that Cooley Group received calls not only from Rhode Island institutions, but also from numerous other states and counties across the country.
Within 15 days, Cooley pivoted its manufacturing prowess. By leveraging a collaborative, agile project management approach, Cooley developed and produced medical gowns with plans to begin shipping over 1 million ft2 of material per week to support hospitals in Rhode Island, Massachusetts, Connecticut, Florida, California and Louisiana. In response to this urgent healthcare crisis, Cooley invested a significant amount of time and money to experiment, run trials, and acquire expedited lab-testing for blood pathogens and launder ability in order to produce gown material for the first time in the company's history. According to Lunati, Cooley prioritized not only the speedy delivery of gown material to the most desperate locations, but also the assurance that the material was consistently well-made. Despite the urgency, Cooley was unwilling to compromise on the quality of the gear that protects our first responders.
Will Our Adaption Qualify?
Retrofitting an existing piece of equipment to use for a different function than it was originally intended for, with that capability unknown from the onset will most likely qualify. If your company had to experiment and run trials, as was the case with Cooley, it will meet the requirements. The adaption only needs to be new to you, not to the industry as a whole.
However, if the adaptation of existing components relates to a simple modification to fit a customer requirement or need, or is a duplication of an existing business component, it will not qualify. Nor will any research related to the reproduction of an existing business component from a physical examination of customer supplied plans, blueprints, detailed specifications, or publicly available information.
Many companies have risen to the challenges of COVID-19. Numerous pivots and adaptions seen all throughout the country rely heavily on R&D activities, and companies are now positioned to claim federal and state R&D Tax credits. Tax credits that can help support and stimulate innovation that will no doubt be needed for many months to come. We are here to help as we collectively navigate through these uncertain times. Do not hesitate to contact any member of your KLR service team for assistance. Visit our Coronavirus Resource Center for more information.