The marine industry is no stranger to innovation and uncertainty. Boat building projects, including government vessels; commercial ships; and recreational boats can frequently qualify for R&D tax credits, but it’s important that the qualified activities and expenses are correctly identified and properly documented to support the credit.
In addition to shipyards and boat builders, certain third-party consultants such as naval architects can also potentially qualify for the credit.
What is the R&D Tax Credit?
The R&D tax credit is 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.
Here are some of the most common client questions we encounter on this topic.
How Much Can a Company Save with R&D Tax credits?
With a wide variety of qualified expenses within the boat building industry, it’s difficult to give an exact estimate. Depending on company size and the types of activities performed, our clients have saved anywhere from $50,000 to $5 million through R&D tax credits.
The high costs required to design and build first-in-class vessels or prototype hulls can often lead to substantial credits.
The amount saved is based on the amount of expenses that are determined to be eligible for the credit, not the revenue generated by a company. Generally, we find the amount of federal credits to be approximately 5%–10% of a company’s development expenses during a given year, and this can be much higher when state credits are factored in.
Note that qualified development expenses generally include much more than just internal research and development (IRAD). Expenses incurred under contract also often qualify if certain criteria are met.
What Does the R&D Credit Apply To?
Companies that take on technically challenging projects that require the design and development of new or improved hulls, onboard systems and components, or new construction techniques generally have expenses eligible for the credit.
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 being top concerns for the industry, many boat building 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.
What Activities Within the Marine Industry Qualify for the R&D Credit?
The presence of technical uncertainty is one of the primary qualification criteria for the R&D credit.
The marine industry is especially conducive to qualifying for R&D credits given the substantial amount of inherent technical uncertainty associated with designing new hulls and the need to innovate around that unknown risk.