Plastics/Polymers are vital materials at the heart of innovation and advancement in almost every industry. Injection molding makers shape these raw materials in countless ways to turn our dreams into reality. From the mission-critical parts for aerospace to life-critical parts for medical, mold builders leverage the latest technology, tools, and techniques to shape a better tomorrow.
Because of their innovative nature, most companies in the injection molding industry qualify for the R&D tax credit—one of the most significant tax breaks available in the U.S. Thanks to the elimination of the “Discovery Rule” in 2003, companies don’t even have to invent anything “new to the world” to become eligible for this significant tax break.
As long as the molding builders introduce products, processes, or techniques that are new to their companies, they could recoup up to 10% of their qualified research expenses (QREs). Injection molding builders of all sizes should look for opportunities to capture their well-deserved research tax credit to reduce their year-end tax liability and reinvest in innovation.
What does it take to qualify for the R&D tax credit?
For research activities to qualify, they must undergo the 4-Part Test.
- Permitted Purpose: The activity must relate to new or improved business components such as developing or improving a product, process, software, technique, formula, or invention.
- Technological in Nature: The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.
- Elimination of Uncertainty: The activity must have the intention to eliminate uncertainty about the development or improvement of a product or process.
- Process of Experimentation: The taxpayer must engage in an evaluative process through modeling, simulation, systematic trial & error, or other methods.
Once a business determines its qualified research activities, it must then identify the accurate amount spent on those activities. As defined by §174 of the Internal Revenue Code, the R&D tax credit will be calculated based on the number of qualified research expenses. QREs include the wages paid to employees, supply expenses, and contract research expenses. With that in mind, here are the four key activities that we often find R&D tax credit opportunities in the injection molding industry.
1. Designing new or improved molds
High-quality plastic parts start with a great mold design. Typically, in the initial mold design process, you will identify and assess alternatives for materials and create potential iterations. These processes are intended to eliminate product development uncertainty and they qualify for the R&D tax credit.
Whether the technical research is performed during the sales/quote process or the actual production, most mold builders take an iterative approach to come up with the best designs that fulfill the project specifications and requirements.
- The wages of the sales representative performing pro bono research during the quote process
- The wages of product managers participating in meetings to discuss the design, materials, and function of new molds
- The wages of designers configuring designs with computer-aided design (CAD) software
2. Developing or improving precision tools
Proper toolings are crucial to producing high-quality parts with a high production rate. Designing and developing toolings require assessing various factors such as complexity, lifetime, application, and fabrications of tooling, all of which qualify for the tax credit.
Even if you outsource tooling design and fabrication to third-party contractors, chances are you can still get a portion of your expenses back. As long as your company retains substantial rights to the research performed by the contractor and bears the economic risk associated with the contractor's R&D results, you can recover up to 65% of the amount paid to the contractor.
- The wages of tool designers creating precision tools or casts
- The wages of CNC machinists validating tooling components
- The raw materials used to test new or improved precision tools
3. Performing structural analysis or testing
The structural analysis is an integral component of the molding optimization process, leading to significant improvements to your finished product. During the structural analysis, you may evaluate the mechanical integrity, hydraulic performance, flex tolerance, and durability. Since this analysis entails the process of experimentation to validate the model, it qualifies for the R&D tax credit.
In addition, various tests performed to improve plastic materials, part design, or manufacturing process, such as injection molding pack and hold tests, generally meet The Four-Part Test.
- The wages of engineers optimizing pack time, hold time, and pressure
- The wages of analysts simulating and optimizing how molded parts react to external influences
- The raw material costs used to perform structural analysis or testing
4. Implementing any automation or process improvements
Have you implemented robotic automation to improve production capacity? Or have you improved the process in your facility to stay competitive in the market? As we’ve discussed above, the R&D activities don’t have to be extraordinary to qualify for the credit. Even minor changes made in your process can get you the dollar-for-dollar cash savings.
Let’s say you introduced automation or robotics to overcome the labor shortage. Since the IRS defines qualifying “supply” expenses spent towards “any tangible property other than (1) land or improvements to land, and (2) property of a character subject to the allowance for depreciation”, depreciated injection molding machine won’t qualify for the credit. However, the time spent researching, evaluating, or testing new robotics is considered a qualifying expense.
- The wages of engineers integrating AI into the existing system
- The wages of the owner involved in process improvement initiatives
Take the next leap
R&D tax credit regulatory requirements are constantly changing. For example, take the recent update implemented in January 2022; businesses must provide additional documentation to be compliant. The key to claiming the R&D tax credit is consulting with an expert who stays abreast of the IRS requirements. Don’t miss out on an opportunity to increase your bottom line - let’s discuss your situation today and find out how much you’re owed.