|Here at Tax Credits Group, we’re often asked if tool and die shops can qualify for the R&D tax credit.
The short answer—absolutely.
The longer answer to whether your work is eligible for the R&D tax credit requires a deep dive into IRC § 41, which outlines a “4-Part Test” which all jobs or projects must meet to qualify for the credit.
With that in mind, let’s look at each of these four parts as they relate to the tool and die Industry:
1. Permitted Purpose Test
This test states that in order to qualify for the credit there must be a resultant “business component.” Simply put, this means you must be developing a new product, process, computer software, technique, formula, or invention. — The good news is that this requirement is a pretty big umbrella.
For tool and die makers, many projects have stringent specifications presented by the customer—think cost, tolerances, durability, unique materials etc.—which require custom designed products and new design methods. Not to mention the way shops are constantly challenged to adapt to newer, lighter materials and other industry evolution’s aimed at reducing the overall part cost. The point is that most projects present enough new and unique challenges to pass test number one.
2. Development Uncertainty Test
If your are uncertain about whether or not you have the capability to complete a project, the method you’ll use to complete the project, or the appropriate design needed to complete the project, you’ll likely pass test number two. And as we discussed above, the constantly changing requirements of this industry often present significant technical uncertainties at the outset of projects. Here are just a few examples:
- Can a tool, die or mold be developed to meet all of the project specifications
- How will you handle venting and cooling to address temperature-related issues
- Can a die be developed to allow proper injection of new/difficult materials
- Can a die be developed to allow proper ejection of a completed part
- Can the design meet the required tolerances and durability requirements the customer demands
The takeaway here is that you don’t have to be convinced the project will fail for it to qualify. Simply being unsure of how you will accomplish the goals of the project is often enough to meet this test.
3. Process of Experimentation Test
This test requires you to “engage in an evaluative process capable of identifying and evaluating more than one alternative to achieve the desired result.” Think prototypes, mock-ups, early failures and multiple iterations.
The tool and die industry is typically well-suited to meet this test because things often don’t work as planned the first time around, requiring some trial and error experimentation to get things right. Even better, there is often a great deal of associated documentation to demonstrate the many alternatives considered (CAD designs and part drawings are especially helpful).
Here are a few examples of a typical “experimentation” in the tool and die industry:
- Initial review of part drawing and specification
- Internal evaluation of capability to design to specification
- Interaction with customers regarding suggested improvements to part design or material to be used that may improve functionality and production capabilities
- Initial CAD design of die and submission to customer for initial design review and approval
- Construction of prototypes dies and tooling
- Prototype production runs and quality assurance of parts produced
- Multiple iterations of re-design until die is completed and final approval is received
4. Technological in Nature Test
This test simply requires that the activities performed rely on the principles of the physical sciences. There’s typically no trouble here, since the modern tool and die industry is basically built on the fundamental principles of engineering and computer science.
Still unsure how the R&D tax credit might apply to you?
Here are two real world examples. One is a small shop, one is a much larger operation:
- A small Ohio fabricator and tool and die facility was designing and producing unique parts for the auto industry. We reviewed eligibility rules and requirements and worked with management to identify qualifying activities and credit eligible employees. After identifying a core team of approximately 10 employees from various departments including project managers, shop supervisors, and tooling designers, we calculated an annual federal credit of approximately $21,000 with an additional credit of $4,000 at the state level for a total annual benefit of $25,000.
- A large Wisconsin tool and die facility was specializing in molds and tooling capable of handling many new and unique materials and complex designs for the auto industry as well as several other sectors. We interviewed management and staff to determine qualifying projects and activities and to determine the amount of time certain key employees spent on qualifying R&D activities. The study included two C-suite level employees who were intimately involved in the design process, as well as several design engineers and CAD/CNC programmers. Based on the strength of the qualifying activities, a multi-year study was undertaken that captured a total benefit of approximately $185,000.