October 27, 2020
Case Studies
R&D Tax Credits

Fourth-generation Contract Manufacturer Modernizes Accounting, Applies for R&D Tax Credits for Manufacturing

PMBA Navigates Complex Process for Results Beyond Expectations

The Challenge

It is never too late for a qualified company to apply for and claim R&D tax credits. However, many companies are unaware of these lucrative credits, that their business activities qualify, or that their state, in addition to the federal government, offers them.

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    About the Company

    The company is a private, fourth-generation family-owned injection molding company that researches, develops, manufactures, and distributes custom made supplies for major industrial clients. The contract manufacturer provides clients with ongoing product innovation and manufacturing process improvements through its research and development initiatives.

    With headquarters in the U.S. Midwest, the company also maintains some operations abroad.

    The current management is led by siblings who inherited the business. Their business strategy involved updating operations, including their fabrication, application and analytics laboratories, manufacturing facilities, and modernizing their financial and accounting processes, which had been handled until then by a small, local firm.

    Management hired a controller, the company’s first full-time financial professional, and sought a larger accounting firm with more sophisticated, multi-national capabilities. The new controller had previous experience with R&D tax credits and conferred with the new accounting firm, which agreed that the company might qualify. The firm had worked with PMBA on other client engagements and subsequently made the recommendation.

    The client was aware of PMBA’s national presence and heard Peter J. Scalise, head of PMBA’s National R&D Tax Credit Practice, speak at conferences, and present accredited courses for the CPA firm community. Because of this sense of confidence and familiarity, the company explored their qualifications with PMBA’s support.

    The Process

    Peter and his engagement team traveled to the client’s headquarters to gain first-hand knowledge of its operations and determine the federal and multi-state level R&D tax credit programs’ applicability.

    On December 18, 2015, The Protecting Americans from Tax Hikes (PATH) Act was signed into law. The act made the Research and Development Tax Credit permanent for the first time in its 34-year history. The credit is permanent for costs related to qualified activity incurred after December 31, 2014. Among other industries, it covered manufacturers and eliminated the Alternative Minimum Tax (AMT) floor that had previously precluded eligible small firms ($50 million or less in average gross revenues for the prior three years) from taking advantage of the credits.

    The specific qualifications for contract manufacturing are onerous and arduous. It requires a subject matter expert with the proper experience and expertise to determine that a contract manufacturer’s activities are qualified R&D activities.

    The client also potentially qualified for its state’s R&D Tax Credit. This required an even more impeccable process to identify qualified activities. First-time applications can trigger audits. This reality makes it imperative that the R&D tax credit specialist builds in the ability to defend the credits in an audit situation.

    The Results/Benefits

    A number of the company’s activities were deemed eligible, and PMBA worked with management on both its federal and state R&D Tax credit claims. The company was awarded tax credits far beyond its initial expectations. And even though the state initiated an audit, PMBA supported the client throughout a six-month audit process within its original fee structure, at no additional cost.

    Although PMBA suggested it would support the company in tax court, the client decided to settle the audit as the result was approximately 90 cents to the dollar. The credit still greatly exceeded its initial expectations. And with its qualifications established, the firm has an ongoing R&D tax credit strategy contributing to its growth plans.

    According to the company’s controller, “As a smaller client, the degree of service we were provided by PMBA — especially when defending their work — was incredible. It was a full-throated, top gun defense. In fact, Peter Scalise quoted the state statute verbatim in conversations with the auditor and placed our activities in the regulations’ context. It was impressive. We never felt that it was too much of an imposition for PMBA to go the extra mile.”

    To determine your manufacturing or contract manufacturing firm’s qualifications for federal and multi-state R&D tax credits, contact the PMBA National R&D Tax Credit Services team at R&Dincentives@PMbusinessadvisors.com. To learn more about PMBA’s National R&D Tax Credit Service for manufacturing and other industries and to see whether your state offers credits click here.

    It’s never too late!

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