Like many foundries and diecasters, your company may be making substantial investments in time and resources to develop and improve casting designs and metalcasting processes. Do you realize that there are federal and state research and experimentation tax credits that reward companies for those efforts?

The Research & Experimentation tax credit, also referred to as “R&E” or “research” tax credit, is designed to incentivize companies to invest in people and technology that can lead to growth in revenues and profitability, as well as to promote job retention and expansion.  These credits focus on qualified wages, supply costs, and contract research. 

When first enacted in the 1980s the R&E credit was available only to companies that fit the more traditional definition of research, including those in pharmaceutical and defense-related industries.  This was because of a requirement called the “Discovery Test,” which stipulated that the research had to expand or refine the level of knowledge within the particular industry wherein the research was being conducted.  This level of innovation was so strict that a patent or at least a patent application usually was required to demonstrate the achievement of the threshold for this definition of research.

In 2004, the discovery test was removed1, and since then the requirement for the credit is only for the innovation to be new to the company, meaning that metalcasters can take advantage of the R&E tax credit using technologies that may have been available for many years. Companies in industries not previously thought to be eligible for the R&E tax credit now can realize these benefits. 

Identifying Qualified Projects — Now, projects must pass what is referred to as the “four-part” test to be eligible for the R&E tax credit. The four parts are:
1. The “business component” test: the projects can be a product, process, formula, technique, software, or invention;
2. The “uncertainty” test: this requirement is met if at the outset of the project there is uncertainty as to the capability of the method (process) for developing or improving the business component, or of the appropriate design of the product;
3. The “technological information” test: the research conducted must fundamentally rely on the physical or biological sciences or on the engineering disciplines;
4. The “process of experimentation” test: substantially all of the activities designated as qualified must involve a process of experimentation.  Examples of acceptable forms of experimentation include modeling, simulation, or systematic trial and error.

According to the regulations governing the R&E tax credit2, the time associated with the development and improvement of the manufacturing processes for qualified projects can be claimed for the credit. This time is related to the wages of the employees engaged, supervising, or supporting these activities, a percentage of which is returned to the taxpayer as a credit. Examples of these types of activities include development of gating and risering systems for new castings, improvement of foundry processes, such as coremaking, molding, and melting; and experimentation with different binders, refractories, and alloying materials. 
2.  T.G. Missouri Corp. v. Commissioner, 133 T.C. No. 13