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Plastics Industry R&D Opportunities

April 8, 2022


Jonathan Cardella

Strike Summary

  • There are certain restrictions when taking advantage of both Sections 174 deduction/capitalization and Section 41, which can be seen in Section 280C.
  • Businesses that choose to elect Section 280C for their federal taxes could also lower their state taxes as well.
  • Taxpayers that want to use Section 280C must plan ahead because it can only be used on an originally filed return.
  • The recent passage of the Tax Cuts and Jobs Act may have have affected whether a taxpayer should use Section 280C in their tax strategy.

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

Strike Summary

  • Since its introduction in 1862, the plastics industry has grown to become a necessary component of modern life.
  • As plastic factories continue to relocate to industry hubs, opportunities will open up for improved automation and processes.
  • Next-generation plastic products, that tackle issues like pollution and biodegradability, will qualify for tax credits to reduce the expenses of innovation.

Plastic was invented and introduced in 1862 at the London International Exhibition to no critical acclaim. This first version of plastic, called Parkesine, was created as a waterproof substitute for shellac. It didn’t enjoy widespread adoption or advancements until WWII when wartime efforts required lighter materials to build planes, and pushed plastic innovations to the next level.

Today the plastics industry touches nearly every aspect of modern life, from healthcare applications like syringes and tubing to communication devices such as cell phones and hearing aids. Plastics and polymers lie at the center of advancement in almost every industry, replacing traditional, more expensive, and heavier materials like metal, glass, wood, and ceramics. 

The plastics industry is worth $580B in the U.S. alone and is expected to increase significantly in the next decade. Plastic and polymer manufacturers’ activities, from extraction to processing to experimenting with biodegradable plastics, are all eligible for research and development (R&D) tax credits.

What Activities Qualify for R&D in the Plastics Industry?

Learning to identify qualifying research and development activities helps manufacturers, business owners, and CPAs as they plan, document, and produce groundbreaking products. 

From extraction to recycling, many activities and projects are likely to be classified as qualified research activities. As you read through the examples, remember that activities don’t need to be successful to qualify. Time and effort are deductions companies can take, even if the companies are still working out solutions.

  • Improving the resistance of polymeric products against environmental impacts, including temperature, pressure, chemicals & solvents, or ultraviolet radiation
  • Finding new ways for plastics to be recycled or composted, including using wax worms
  • Developing or improving polymer-specific manufacturing processes, including processes used in pilot plants
  • Engineering processes for the production of new resins and bimodal plastics
  • Implementing online production testing capabilities and feedback control systems
  • Using AI and machine learning for automation, including building new software
  • Designing and developing new or improved molds, tooling, and fixtures
  • Evaluating new/improved processes using 3D melt flow simulation software
  • Engineering new dies, tooling, and fixtures used in novel processes.

What Qualified Expenses Are in the Plastics Industry?

IRS Section 41(b) describes qualified expenses as the expenditures a company accrues while conducting research activities on qualified projects. They fall within four categories: 

  • Employee Wages: Wages subject to withholding (W2 Box-1) paid to employees directly engaged in qualified activities, and those employees directly supervising and supporting R&D staff. Qualified employees can perform R&D activities throughout your organization, from entry-level staff to C-Suite leadership. Certain self-employment income from partnerships, LLCs, and sole proprietorships also meet the definition of wages.
  • Supply Costs: Supplies and raw materials used or consumed during the research and development process can be included towards the credit. This can include pilot plant operation expenses and the cost of raw materials or new molds and dies. 
  • Contract Research: Third-party contractors, subcontractors, or service vendors based in the U.S. who are paid by a business can also qualify as an R&D expense. 
  • Computer Leasing/Rental: Cloud computing services, a frequent storage choice for companies developing technology or software, can also be a qualified R&D expense.

Substantiating your R&D tax credit claim requires careful documentation. To prove that employee wages, supply costs, third-party contractors, cloud storage, etc., were part of the research and development process, taxpayers must provide extensive proof. Beyond financial statements, they should also include expense reports, payroll, project lists, testing reports, customer contracts, and supporting documentation like WIP reports. 

The Future of Plastics Innovation

The plastics industry has embraced physical location clustering to reduce the strain on its supply chain. Locating manufacturing facilities close to oil production also facilitates innovation. Companies can tap into similar customers and partners while working with state governments that are friendly toward their industry. States like Texas, Ohio, Pennsylvania, and Illinois are current examples of oil and plastics hubs.

The plastics industry has come a long way since its introduction as Parkesine in 1862. Today’s plastics companies are working on next-generation products that can be broken down by bacteria, worms, or sunlight. Concerns about single-use plastic (e.g. toothpaste tubes, garbage bags, water bottles, disposable food containers), environmental sustainability, and pollution will change how plastic is used in the next decade. 

Recycling and biodegradability will definitely play an outsized role in the future of plastics manufacturing. 

Claim and Reinvest the R&D Tax Credit

After collecting the proper documentation needed to calculate the credit, you need to include form 6765 with your annual federal income tax return to claim the R&D tax credit. Although the IRS provides the instructions for companies to file this form, business owners may still be confused. 

Many companies believe that they need to pay taxes to claim the credit. Qualified Small Businesses (QSBs) can use R&D credits to offset payroll taxes, even if the company is in losses. Even if your company is in losses, you can still carryforward the credit for 20 years until you have regular tax liability.

The R&D tax credit is one of the most complex sections of the tax code. Even CPAs outsource their clients’ R&D claims to experts like Strike. See how much your company could get back with our R&D calculator, and contact one of our tax specialists today to get started.

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

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