4 Things to Know about R&D Tax Credits for the Forest Products Industry

The forest products industry is no stranger to innovation over its long history. Substantial tax incentives, such as the R&D tax credit, are available to help support and sustain that development activity for today’s companies.

But first, what is the R&D tax credit?

The R&D tax credit is available to companies developing new or improved products or processes, including software, that result in increased performance, functionality, efficiency, reliability, or quality.

It’s a dollar-for-dollar tax savings that directly reduces a company’s tax liability. There’s no limitation on the amount of expenses and credit that can be claimed each year. If the R&D credit can’t be used immediately or completely, any unused credit can be carried forward for up to 20 years. In addition, previously filed tax returns can typically be amended for up to three years to claim the R&D credit retrospectively, providing an avenue to recoup previously paid taxes. 

New or small business may be eligible to apply the R&D tax credit against their payroll tax for up to five years starting in 2016. The R&D credit is available both at the federal and state level, with approximately 40 states offering an R&D credit to offset state tax liability.

To help break down this complex topic, here’s a list of common questions forest products companies have about the R&D credit.

1.            How much can a company save with R&D tax credits?

Companies can receive a credit refund of up to 11% of their qualified expenses, depending on a number of factors. Generally, the more a company spends on qualified R&D, the higher the credit they’ll receive, with taxpayers receiving a larger credit if they increase R&D spending year over year.

2.            What does the R&D credit apply to?

There are two main types of activities that may qualify for the R&D credit:

  • Developing new or improved products
  • Developing new or improved processes

With safety, quality, and cost-efficiency top concerns for the industry, many forest products companies are investing in development of new equipment or manufacturing processes as well as developing new products to maintain a competitive position in their markets. The investment in equipment, labor, and materials for development projects not only helps companies keep a competitive edge but could also qualify for R&D credits to offset their outlay of capital.

3.            What activities within the forest products industry qualify for the R&D credit?

Here are some specific examples of R&D activities for the forest products industry that have qualified for the credit:

  • Investment in new equipment to produce landscaping material with more consistent grade
  • Development of new laminating materials and methods to improve product quality and durability
  • Optimization of manufacturing processes to reduce downtime for maintenance and repair

Additional activities that could qualify for the credit include:

  • Development of new or improved products to meet market specific demands, including sustainably sourced materials, strength, durability, weatherization, fire-retardant ratings, and aesthetic appeal
  • Implementation of new or improved quality assurance testing processes
  • Installation of new or improved waste recycling systems
  • Improved sustainability initiatives to reduce emissions or deforestation
  • Investment in new or improved automated process to improve safety, quality, or throughput

4.            What’s the next step to apply for the R&D credit?

If you think your company may qualify for the R&D credit, the first step is to collect preliminary information about your company’s potential qualified activities. That information is used to develop an estimate of the credit benefit your company could receive as well as identify other R&D-related tax planning opportunities so you can make an informed decision about whether an R&D credit analysis is worthwhile for your company.

We’re Here to Help

Each company’s goals, values, and resources are unique, which makes it important to develop a customized project plan to identify, calculate, and support your company’s R&D credits and activities.

With recent increased IRS scrutiny around R&D credits, it’s also crucial to understand what’s necessary to substantiate a credit claim. To learn more about R&D tax credits, see Five Misconceptions about R&D Tax Credits—and if You Qualify , or request a credit benefit estimate to see how much your company could save.