Posted on Nov 27, 2017

R&D Credit Qualification

R&D Study

If it is determined in the course of our tax consulting that your firm could qualify for a substantial R&D tax credit, we may suggest a third-party expert to conduct a more extensive R&D study. Our team has experience with initial discovery and phase two project review and qualification for low to medium R&D activities, but we align with experienced tax credit project partners when considering complex or high R&D activities.

For architecture and engineering firms, most use some type of project accounting data that can help R&D experts analyze Qualifying Research Expenses (QREs). The most significant qualifiers or data fields to review include:

  • Contract type
  • Line of business or discipline
  • Project type
  • Phases, sub-phases or tasks
  • Employee hours, titles and departments
  • Subcontractors
  • Project location

This data should be reviewed prior to interviews with leaders or project managers. It will help the R&D expert determine the right questions to ask about each project. You may allow the expert to export the data or provide the expert with templates that include this information and other data requested.

The second phase of an R&D study is the Communications or Project Review Phase. The R&D expert will walk through the four-part test and discuss product development lifecycle to help the project team identify and qualify R&D activities. This phase may take some time to educate firms that are new to R&D QRE qualification, but mentioning the potential tax savings can support participation. Any qualifying activities will be identified by project and phases of development.

The third phase of an R&D study is the calculation of QREs. The R&D expert will review the ratio of each employee’s qualified research hours to total hours worked. Those possible taxable wages will help the expert determine wage expenditures linked to R&D. The same calculations will be made regarding supply costs, subcontractors and contract or agreement expenses.

The final phase of the R&D study is documentation. The QREs calculation will need to be documented to note the QREs by phases/tasks performed on qualifying projects. This level of detail will support a credit claim to the IRS for the current or previous tax years.

Documentation is Critical for R&D Study

According to Barry Devine, an R&D study expert at Corporate Tax Incentives, with offices in California, Denver, Atlanta and Houston, documentation is critical to achieving a successful IRS R&D credit claim. Documentation needs to happen during the normal course of business as a sort of data map to prove R&D activities. The documentation process should not overly burden the firm — once it’s set up, of course.

By following the firm’s standard project set-up guide, you should be able to locate documents consistently under the following categories or standard practices:

  • Document name
  • Location of document
  • Frequency document is generated
  • Document owner or author
  • Instructions to find and access the document
  • Testing results
  • Project timelines
  • Meeting minutes

Your firm may have the documentation in your system, but a consistent process for project documentation will make it easier to claim R&D credits now and in the future.

Talk to the tax team at Cornwell Jackson about your potential R&D qualifying activities. We can review your data to discover qualifying research expenses and help you decide if an R&D study would be financially valuable for your firm.

Continue Reading: Common Qualifying Activities and Case Examples of R&D Credit Qualifications

Gary Jackson, CPA, is a tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax planning to individuals and business leaders across North Texas. Contact him at

Posted on Nov 14, 2017

R&D Credit Qualification

It may not be as easy for architecture and engineering firms to qualify for R&D credits, but that doesn’t mean it’s impossible. Now that tax reform may result in lower corporate tax rates, it’s a good time to investigate any R&D activities that occurred for the 2015, 2016 or 2017 tax years. Resulting credits could offset higher federal tax in previous years as well as state franchise or business tax collected in Texas. The first step is an R&D study.

R&D Credit Qualification

Sustainability has been a trend in architecture and engineering for many years. As professional service firms develop new processes and methodologies for making buildings stronger, more environmentally friendly or flexible for users, they may not be thinking about how this innovation could reduce their tax impact.

Once the primary realm of manufacturing or product developers, we know that research and development is happening in service-based industries, too. Due to some changes to federal tax law, options have expanded for more firms to access R&D tax credits. In addition, the digital solutions that companies use to track project costs and processes may make it easier than in the past to collect data and determine eligibility.

A recent case study of one engineering firm that underwent an R&D study found enough quantitative data on R&D costs to support refunding most of the firm’s federal tax liability for the three prior tax years. There was also enough carry-forward remaining to provide the estimated equivalent of an additional four years’ worth of credit. When the firm was audited, according to R&D study expert SourceHOV|Tax, the IRS audit was clean.

The data to support the credit came from the engineering firm’s experience with large government and corporate clients that would request sustainable structures and require new designs to accomplish it. The firm’s historical preservation projects also require new processes and methodologies to strengthen buildings and support longevity without compromising historical integrity.

If you have even the slightest sense that an R&D study could benefit your engineering, design or architectural firm, know that there are different levels of studies that can accomplish your goal. Most importantly, current discussions around tax reform make this 2017 tax year the best time to look into it.

Here’s why:

Tax Reform Encourages Closer Look at R&D Credits

Two years ago, federal legislation made the R&D Tax Credit a permanent business credit, which meant that business owners could now plan ahead for future tax years rather than guessing whether or not it would be available and for which types of businesses.  The credit was expanded to offset the Alternative Minimum Tax for private, Eligible Small Businesses (ESBs) with  gross receipts of less than $50 million. There is also a payroll tax offset up to $250,000 available to Qualified Small Businesses (QSBs) with less than $5 million in gross receipts that were started up to five years ago.

If they qualify, businesses can receive a credit for qualifying R&D expenses that may include the following:

  • Salaries and wages – mainly W2 (Box 1)
  • Supply costs – used or consumed during research and experimentation
  • Contractor costs – up to 65 percent of qualifying costs, including paying for rights and risks of R&D, which means assuming the risks of experimentation without any funding for it and having substantial rights to the research results

In order to quality for the credit, businesses must pass a four-part test related to their research and development activities in a given tax year.

Permitted Purpose – Is the activity intended to improve a business component’s functionality, performance, reliability or quality?

Technological in Nature – The activity performed must not rely on social sciences, but on the principles of physical, biological and computer sciences or engineering

Elimination of Uncertainty – The activity is intended to discover information to eliminate technical uncertainty regarding the capability or method for developing or improving a product or process, or the appropriateness of the business components’ design

Process of Experimentation – With the result being uncertain, the activities involved in trying to achieve the result must be experimental in nature, and include actual experiments and evaluation of one or more alternatives

A few of the qualifying research expenses (QREs) for architectural and engineering firms could happen during the Pre-Design and Bidding process when professionals may experiment with initial design and concepting. But the most significant QREs occur during the Schematic Design and Design Development phases. Professionals may need to evaluate, analyze and test concepts more heavily and also produce mock-ups of innovative or untried processes and methodologies for the client.

Your firm may have already conducted qualifying R&D in previous years and not realized that expenses related to that R&D could make your firm eligible for a tax credit. Fear not. R&D Tax Credit studies can look back three tax years to identify qualifying research expenses. The reason this may be significant for your business now is that tax reform may reduce corporate tax rates going forward. The potential for high tax savings through an R&D tax study won’t get any better than now if corporate tax rates drop for 2018.

The current R&D credit allows firms to offset federal taxation as well as state franchise or business taxes in Texas for tax years 2015, 2016 and 2017. For qualifying businesses, the resulting tax credits often outweigh the costs of an R&D study when you factor in the potential federal and state tax savings.

If your firm provides any of the following services, it is worth considering an R&D Credit Qualification tax study:

  • Architecture
  • Geotechnical services
  • Civil engineering
  • Structural engineering
  • Mechanical engineering
  • Electrical Engineering
  • Surveying

There are exceptions to R&D conducted in these disciplines, the main one having to do with funded research. If your firm is under contract and paid to conduct research or if you have received a grant to conduct the research, it may be hard to prove that your expenses qualify for a tax credit. A tax expert experienced with R&D tax credit feasibility like Cornwell Jackson can usually determine this factor early in the discovery process.

Talk to the tax team at Cornwell Jackson about your potential R&D qualifying activities. We can review your data to discover qualifying research expenses and help you decide if an R&D study would be financially valuable for your firm.

Continue Reading: What is an R&D Study?

Gary Jackson, CPA, is a tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing tax planning to individuals and business leaders across North Texas. Contact him at

Posted on Jun 29, 2016

Safety First

“Safety First” should be your corporate mantra. Focusing on the safety of your products as you make them can help avoid complaints and litigation, give you a marketing edge and raise the bar for other manufacturers, according to the Consumer Product Safety Commission.

10 Quick Manufacturing Safety Tips

1. Build safety into product design.

2. Test products for all foreseeable hazards.

3. Stay up to date on manufacturing safety developments.

4. Educate consumers about product safety.

5. Track and address your product’s safety performance.

6. Fully investigate safety incidents.

7. Report product defects promptly.

8. If a defect occurs, quickly start a recall.

9. Work with the Consumer Product Safety Commission on any recall.

10. Learn from your mistakes — and others.

The two companies took a proactive approach rather than waiting for an industry standard to address the problem. They developed a method to “pinch-proof” the hinged joints between the doors’ panels. Their leadership challenged other manufacturers to meet the same high standards.You don’t have to be a huge corporation to come up with safety innovations. For example, Martin Door Mfg., a small Salt Lake City firm, and Wayne-Dalton, a larger company in Mt. Hope, OH, were both confronted with a safety issue in the garage doors they made — a large number of crushed or amputated fingers were reported after using their products.

Taking the lead is the key to improving manufacturing safety. There are several steps you can take — even before a problem develops:

Investigate your customer base. Who will use your product? For example, will a ladder hold a 300-pound person painting a house? How about a 350-pound person? If the ladder could collapse under a certain amount of weight, warn the consumer.

Study how customers will use your product. Back to the ladder. Although it may be intended as a means to climb, some people are apt to use two ladders and a plank for makeshift scaffolding. Warn the consumer if a product isn’t safe when it is used in ways you didn’t intend.

Stay informed about product safety developments. For example, stronger materials may become available for the ladder.

Keep up with safety regulations, as well as safety precautions taken by other companies. When the garage door manufacturers realized they had a problem, there were no state or federal regulations regarding it. But both firms recognized that safety made good business sense.

Fully investigate reports of injuries and accidents. A problem could stem from unintended use, but it could also result from a manufacturing or design flaw. An inquiry can help you determine the cause, guide you toward fixing any defect, and let you know whether a product recall of the lot or the entire line is necessary. If a recall is needed, the Consumer Product and Safety Commission will work with you to ensure the plan is effective.

An added benefit: Consumers and the media tend to go easier on companies that police themselves and promptly deal with problems. The media can also get safety warnings out quickly, helping you to avoid future incidents and potential lawsuits.

Posted on Jun 17, 2016

MD Blog PicManufacturers may get an additional boost from a beneficial program that helps small and medium-sized companies.

The Hollings Manufacturing Extension Partnership (MEP), a program run by the U.S. Department of Commerce, would be expanded and strengthened by the MEP Improvement Act. This legislation was recently introduced in Congress and is widely thought to have a good shot of enactment. If passed, the bipartisan act would:

  • Permanently adjust the federal MEP cost share to one-to-one,
  • Strengthen and clarify the review process MEP centers use,
  • Authorize centers to support the development of manufacturing-related apprenticeships, internships and industry-recognized certification programs,
  • Increase the program’s funding level to $260 million a year through 2020, and
  • Require the program to develop open-access resources describing best practices for small manufacturers.

Top Shelf Endorsements

The bill has been endorsed by some high-visibility entities, including:

  • Information Technology and Innovation Foundation
  • American Small Manufacturers Coalition
  • Alliance for American Manufacturing
  • Honda North America
  • Association for Manufacturing Technology
  • National Council for Advanced Manufacturing
  • Manufacturing Skill Standards Council.

MEP is built on a nationwide system of service centers that are partnerships between the federal government and a variety of public or private entities, including state, university and not-for-profit organizations.Since its inception in 1988, MEP has focused on strengthening the U.S. manufacturing sector. The program’s power lies in its partnerships. Through collaborations with federal, state and local entities, it puts manufacturers in position to develop products and customers, expand globally and adopt new technology.

Return on Investment

Although MEP’s strategic objective is to create value for all manufacturers, it concentrates on small and mid-sized enterprises (SMEs). These account for nearly 99% of manufacturing firms in the United States.

The program has delivered a high return on investment (ROI) to taxpayers. For every dollar of federal investment, MEP generates $17 in new sales growth and $24 in new client investment, according to the program’s website.

MEP’s partnerships are expanding in response to rapidly changing global dynamics. The program has established relationships with diverse organizations. MEP centers also increasingly support government initiatives launched to strengthen U.S. manufacturing. Some of the program’s specific objectives are:

  • Educate local and regional partners on SME needs and causes of behavior,
  • Connect manufacturers to other programs and services offered by partner organization,
  • Identify firms that are interested in a particular technology, as well as informing information technology developers about manufacturer’s technology needs, and
  • Support workforce development programs.

Examples of Success

Here are two examples of how MEP has worked in action:

The exporter. One family-owned business in Wisconsin made standard products for metal fabricators and produced custom products, primarily for handrails. The organization exported some of its products and was able to increase export sales by connecting with the local MEP center and participating in three monthly training sessions, as well as coaching and assistance between the sessions.

Through this program, the exporter joined a group of noncompeting firms that worked together to create an exporting strategy to tap into new markets. The company was able to increase export sales 40% a year and expanded its reach from two to 16 countries.

The device maker. A North Carolina company designed and made high-performance radio frequency systems and solutions for applications that drive wireless and broadband communications. It enlisted the help of an MEP center to provide onsite training on Six Sigma and lean manufacturing principles. Participants were given real-world projects to continue working on after training was complete. The training helped management improve inventory controls and final product test efficiency, resulting in multi-million dollar cost savings.

Continued Challenges

Manufacturers face constant pressure to cut costs, improve quality, meet environmental and international standards, and “go to market” faster with new and improved products. At the same time, new opportunities are constantly beckoning.

As you try to keep pace with accelerating and emerging changes, consider taking advantage of the valuable resources MEP offers. If the MEP Improvement Act passes, the program’s role in the American manufacturing sector is likely to become even more critical.

Posted on Jun 7, 2016

conveyor line

It’s a build-to-order manufacturing environment and that means frequent changeovers in your production line. And each time you make changes to produce a new item, you suffer significant downtime. But there may be ways to shave time off those non-productive periods. These four suggestions have proven to buy manufacturers time and keep production lines efficient:

1. Measure setup time. It should be a key metric in batch-driven processes. If you’re not establishing goals and monitoring setup time, it can get away from you.

2. Mimic NASCAR. One company occasionally stops production to hold a contest, putting together “pit crews” to see who can set up a machine the fastest. The winning team’s time becomes the new goal. Winners get bragging rights.

3. Think Japanese. Manufacturers in Japan are known for their efficiency and ability to make quick changes. One of the techniques they use is Kaizen. Assemble a team that cuts across disciplines and spend three to five days tackling a process improvement problem. For example, one company had a team reconfigure work and storage areas. It reduced setup time from 6 hours to 40 minutes.

Several factors contribute to Kaizen success:

  • Holding the event elevates the problem to priority level.
  • Include people on the team who have no production experience, along with those who do. This improves the problem-solving process.
  • Follow the Kaizen event outline.
  • Set the expectation that the team will make a major achievement in a very short time.

4. Consider another Japanese method.Japanese industrial engineer Shigeo Shingo developed the “Single Minute Exchange of Dies” process for Toyota as an essential component of just-in-time manufacturing. He maintained that most approaches to reducing setup time limit their success by focusing on improving employee skills rather than on making changes in the process that lower the skills needed. Shingo describes how to implement SMED in his book, A Revolution in Manufacturing:

  • Analyze the production system thoroughly and the role setup plays in that system.
  • Study the internal setup, or those processes that can be carried out only when the machine is idle, for example, changing dies.
  • Study external setup, or those processes that can be carried out while the machine is running, such as transporting dies or checking availability of materials.
  • Determine how internal setup can be converted to external setup, thus streamlining the entire process.

Lean Material Stocking

Instead of trying to trim retooling time, try eliminating it with a lean material stocking system.

An established principle of time management is to handle each piece of paper just once. It’s rare to achieve that efficiency, but aiming for it makes you think about unnecessary steps. Applying that principle to parts and maintenance, compare these two scenarios of the typical route from delivery to production:

Before the lean method:

  • Shipment arrives.
  • Parts are stocked until needed for production.
  • Parts are assembled into kits and sent to production.
  • The parts are ready for production when needed.

After the lean method:

  • Shipment arrives.
  • Parts are sorted and sent to carts holding bins labeled for each part number.
  • When production is ready, the cart is moved to the job.

What the lean material stock system does:

  • Eliminates the labor-intensive steps of storing, locating and retrieving materials and assembling kits.
  • Provides visual inventory control, because by looking at a bin, you can see if a part is in short supply.
  • Offers just-in-time capabilities. Almost as soon as materials are received, they are ready to be used in production.

The best changeover is no changeover. Look at ways products can be redesigned to share more of the same parts. Moreover, if you’re running small batches of similar products, you might be able to avoid changeover by taking some processes offline.

Posted on Mar 4, 2016

manufacturing audit, R&D credit, icdisc, manufacturing tax credits, manufacturing dallas, manufacturing employment

In the past year, manufacturing employment in the Dallas/Fort Worth area has dropped by 2 percent. This statistic alone seems negative, but the overall outlook for manufacturing is trending positive with increased focus on innovation, simplified supply chains, diversification into customer-focused services and creativity with materials performance and fuel sourcing. It’s still a challenging industry, but this real or perceived lull in growth is the perfect time to assess the structure and vision of your company. Strengthen the basics with strategic planning to be ready for what’s next.

Strategic PlanningManufacturing Outlook

A slower year or two for revenue may be the opportune time to pursue a transfer of assets to the next generation. If earnings are down 15-20 percent, for example, savings on the transfer and estate tax can be significant if owners act now.

Also, if year-to-year revenue continues to be flat or even less than the previous year, your CPA can help you consider reporting an operating loss and cleaning up the books through carrybacks and refunds from years when revenue was higher.

Even if the company is in good financial health and sustaining a moderate profit, now may be a good time to revisit the company vision, your business model, your KPIs and your tools for tracking them. There are many more integrated solutions that tie the sales side of the house to supply chain, to production and all the way through to realization. Leaders should take time now to explore and demo these various management tools.

Manufacturing Tomorrow

Significant global growth in manufacturing is forecast mainly in Southeast Asia, India, the Middle East and Eastern Europe. By 2025, it is expected that a new global consuming class will have emerged in these developing economies as wages rise and demands for more goods and services increase.

As these manufacturers mature, they will have to focus on reducing costs, appealing to a broader base of customers and finding more skilled workers. In the end, all manufacturers will have to respond faster to market shifts based more on a global pulse than what is happening in their backyards.

In established markets, customers are already dictating variation in products, after-sales customer care and advanced or more environmentally friendly materials. These buyers are doing the majority of research on their own, interacting with the producer only briefly, then hitting the submit button. If they have a bad experience, they report it on social media. Producers are serving increasingly knowledgeable customers who want it their way…or they will go somewhere else.

On the supply side, manufacturers will continue to deal with volatile resource prices and a shortage of highly skilled talent. Difficulty obtaining supplies, regulatory and labor risks and lack of public infrastructure will influence the location and relocation of production facilities.

All of these predictions point to the need for manufacturers to be tech-savvy and globally aware. Even if home base is Dallas/Fort Worth, the market is the world. Work with advisors who recognize this shift. Get your financial and strategic house in order to invest in tomorrow’s opportunities.

If you have any questions about how to add operational efficiencies, reduce taxes or plan for transfer of ownership in your manufacturing operation this year, talk to the manufacturing team at Cornwell Jackson.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s business succession practice. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services to management teams and business leaders across North Texas.


Posted on Feb 17, 2016

manufacturing audit, R&D credit, icdisc, manufacturing tax credits, manufacturing dallas, manufacturing employment

Batten the Hatches

In times of uncertainty in the manufacturing industry, it’s natural to huddle up and think through strategies that protect the short-term while preparing for the long game. Companies will often turn to their advisors between waves of growth to review their operations and make sure they are taking every precaution and advantage.

There is always plenty to talk about in manufacturing. As stated in a previous Manufacturing Outlookarticle, the disruption of oil and gas and energy consumption has impacted companies in the region in direct revenue, but also in their relationships with related industries that rely on the oil and gas industry.

Some of the strategies we’ve seen manufacturers employ have included adjustments to work shifts and right-sizing. However, they are also looking at ways to reduce inventory, improve processes, look for tax breaks and even step up estate planning and succession. The following are areas of the manufacturing business that owners and management can review for savings and efficiency.

Tax Incentives/Deductions

Smaller manufacturers don’t always perceive a qualification for the politically popular R&D credit. They should take another look. Some companies have discovered areas defined as R&D under the tax law that fit them perfectly even if they don’t consider themselves innovative. For example, an improved or proprietary process can qualify even if you don’t have an on-site lab or clean room. Also, think about that customer who asked you to make a small adjustment to the machining of a part. If you engineered it, it may qualify as R&D.

When companies are busy, owners or management aren’t always aware of qualifying innovation happening on the production floor. Consult with your CPA to bring those opportunities to light so they are communicated to staff and recorded regularly.

Other tax reduction strategies can be found in how manufacturers handle personal property taxes. Old assets should be removed from the books when new assets are purchased. Some assets may be improperly classified, resulting in overpayment. Many types of “equipment” can be exempt. In addition, certain idle equipment due to lack of demand may also be factored to reduce the personal property tax.

Of course, bonus depreciation is another go-to tax provision. Manufacturers may qualify under fixed asset expensing or through the Domestic Production Activities Deduction (DPAD). This allows for an additional 9 percent deduction of the lesser of taxable income, or 9 percent of “qualified production activities income” (QPAI). QPAI is equal to the amount by which gross receipts from eligible manufacturing and production activities exceed related expenses.

Activities include, but are not limited to:

  • Manufacturing, production, growth or extraction of tangible personal property in the U.S.
  • Construction of real property in the U.S.
  • Performance of engineering or architectural services in the U.S. in connection with real property construction projects in the U.S.

A manufacturer may also qualify for additional tax rate reduction benefits under the interest-charge domestic international sales corporation (IC-DISC). This tax rate reduction is generated by creating a separate entity organized as a C-Corporation. The C-Corp is deemed to participate in the exporting process of the operating entity and earns a “commission.” That commission is paid by the operating entity, and it is an ordinary deduction, reducing ordinary income. Qualification for this type of tax reduction requires exploration of a manufacturer’s operation and sales chain as well as planning to set up the entity.

There are many other areas that manufacturers can explore with their CPA to improve their tax position.

Process Improvements for Manufacturing Operations

Manufacturers can look at various ways to improve efficiencies and reduce waste in the production line as well as save on utilities, maintenance and materials. In addition to integrated components and sensors to alert staff to potential breakdown, the design of production floors can improve workflow and move product out the door faster.

Manufacturers are also looking at simplifying the steps in each manufacturing process to speed production and make training and improvements easier later. Again, some of these may qualify for R&D, depending on the complexity of the changes and their impact on a particular product or the industry itself.

A lean process study and revamping of core processes could provide a double benefit of both improved profitability and production qualifications for the R&D credit.

Labor and Benefits

Texas-based manufacturers may experience more frequent inquiries by state and federal authorities regarding citizenship and fair labor practices.

Immigration and Customer Enforcement (ICE) will look at companies with a large workforce and ask for I-9s or proof of U.S. citizenship. If they find violations, they will give the owners a time period to comply or face fines. These inquiries and fines cause a disruption in business and unexpected costs. Manufacturers need to take a careful look at their employment rolls to avoid this turbulence.

The same can be said for trends in class action suits that target large groups of employees to pursue claims for unpaid overtime or unfair labor practices as outlined in the Fair Labor Standards Act. Employers, for example, that incentivize employees with bonuses based on production must also demonstrate compliance with any overtime owed to meet those production goals.

Manufacturers can receive incentives for hiring veterans or other special worker classes, but they must be careful when hiring these workers if reductions in force are required later. They don’t want to be perceived as manipulating the system, keeping employees only until requirements are satisfied.

On the benefits side, some larger manufacturers are setting up captive entities to self-insure the operation and/or employees — essentially paying premiums to their captive entity rather than to a third-party payer. If income is steady at $5 million to $6 million a year, a captive can provide another tool for owners as they plan for succession and retirement.

If you have any questions about how to add operational efficiencies, reduce taxes or plan for transfer of ownership in your manufacturing operation this year, talk to the manufacturing team at Cornwell Jackson.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s business succession practice. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services to management teams and business leaders across North Texas.


Posted on Jan 18, 2016

manufacturing audit, R&D credit, icdisc, manufacturing tax credits, manufacturing dallas, manufacturing employment

In the past year, manufacturing employment in the Dallas/Fort Worth area has dropped by 2 percent. This statistic alone seems negative, but the overall outlook for manufacturing is trending positive with increased focus on innovation, simplified supply chains, diversification into customer-focused services and creativity with materials performance and fuel sourcing. It’s still a challenging industry, but this real or perceived lull in growth is the perfect time to assess the structure and vision of your company. Strengthen the basics to be ready for what’s next.

Oil drives Texas. It’s no surprise that the manufacturers we talk to are concernedManufacturing Outlook
about the drop in oil and gas prices. Many of them are tied to the industry as suppliers, fabricators and general contractors. Still, other manufacturers that are dependent on freight and shipping costs are more than happy to see fuel prices drop.

Then we have the valuation of the dollar against foreign currencies that affects trade. Manufacturers trying to compete against materials and products shipped cheaply from other countries must look for efficiencies besides price reduction. China’s economic slowdown does not seem to have helped the cause of U.S. based manufacturing, with weak performance reported around the world.

Although the Dallas/Fort Worth area outpaced many other states in overall economic growth in 2015, rather flat manufacturing performance did not help the cause. This fact was predictably offset by positive gains in hospitality, business and professional services, utilities and transportation, according to an economic update by the Federal Reserve Bank of Dallas.

Flat growth is not the final word. A pause in business is sometimes the perfect opportunity to review the vision, business model, processes and procedures, technology and other foundational contributors to growth. Let’s take a look at the current state of manufacturing and what manufacturers should focus on this year to prepare for the next wave of growth. If you clean house now and invest in the foundation of your business, you will be in a better position to seize opportunities when growth resumes.

Manufacturing Now

Manufacturing in developing countries continues to provide a path to rising incomes and living standards. In advanced economies, it is a source of innovation and competitive strength for exports and productivity. When the Recession hit the industry hard, employment fell with it, delaying the demand for skilled labor.

Well, the demand for labor isn’t necessarily back to the fever pitch of pre-Recession times simply because manufacturers have looked for ways to offset labor with equipment and automation. Manufacturers that have invested in automation since 2010 have survived and even thrived. They are crediting the investment — along with the trend in the Internet of Things (IoT) — to help them efficiently monitor inventory and productivity. Automation has also helped them anticipate and head off problems on the line or in the supply chain — reducing outages and downtime.

In fact, U.S. manufacturers may spend more than $5 billion on new robotic orders by the end of 2016, according to the Freedonia Group. In turn, the demand for labor has shifted to the types of employees who are skilled at both hardware and software. Manufacturers investing in IoT units to reduce maintenance costs and risk of outages will be ahead of their competitors as that industry ramps up in the next five years.

A strong base of defense and aerospace firms in Texas does support this move to what some are calling “advanced manufacturing.” Leaders are calling for the state to continue to create policies and make investments in higher education to support advanced manufacturing infrastructure.

An article in the December 2015 Dallas Business Journal also noted that Dialexa, a consulting firm for technology start-ups, planned to expand its hardware lab, which includes the company’s electrical engineering, embedded software, mechanical design, 3D printing and electrical assembly research and development. This is one example of a company working in emerging technologies that will incubate new types of manufacturing in the Dallas/Fort Worth region.

Manufacturing At Your Service

Another interesting shift in the industry is the expansion of services offered by manufacturers. Rather than strict product manufacturing, some industries employ half of their workforce in non-production roles. This includes R&D engineers, logistics staff and after-sales support and maintenance services. A report from the McKinsey Global Institute predicts that the role of manufacturing in advanced economies leans toward innovation, productivity and trade more than growth and employment. These advanced manufacturers also consume and provide more services than manufacturing facilities in developing countries.

A survey by Grant Thornton on technology trends found that the majority of more than 300 manufacturers surveyed in the U.S. believed that new technologies would bring new opportunities. The top five technologies cited were: robotics, advanced materials, IoT (sensors, interconnected machinery), 3D printing and big data (analytics).

The use of real-time data and analytics, for example, allows manufacturers to run more “what if” testing, according to the report. It can reduce risk and materials costs while improving quality and accelerating new product development.

What is holding back many manufacturers from taking the leap into all of these new technologies?  The biggest reason cited in the Grant Thornton report was economic uncertainty, followed by the perceived risks of adopting technology that isn’t completely proven.

Manufacturers are entrepreneurial, but when it comes to capital outlay they’ve learned to be cautious. Still, a move toward diversification seems to be a natural evolution. Manufacturing can now encompass proprietary customer designs, production and implementation and also after-care services. This diversification is already paying dividends for the job shops whose saavy owners realized the potential for value-added services. More services per customer leads to more loyalty and profit.

If you have any questions about how to add operational efficiencies, reduce taxes or plan for transfer of ownership in your manufacturing operation this year, talk to the manufacturing team at Cornwell Jackson.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s business succession practice. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services to management teams and business leaders across North Texas.

Posted on Sep 1, 2015

The leaders of the manufacturing clients that populate our firm’s client base are by their very nature – innovators. Innovators that are constantly experimenting, refining processes, and trying to determine how to do things better, faster, and cheaper. In particular they are interested in how to create innovations that can bring long-term value to their organizations and their customers.

This value creation from innovation creates jobs and is the main reason that the R&D credit exists in our tax code. So why aren’t more middle market manufacturers claiming this credit? – It seems to me that is likely for one of the four reasons explained below:

  1. Lack of Knowledge

Many manufacturers are third or fourth generation businesses, which could mean a third or fourth generation CPA relationship that may have not kept pace with innovation and current tax law and regulatory changes. Another possibility is that perhaps many years ago you re- engineered your own company tax returns to be performed by an internal department that gets no reward for taking any risks or innovating with new ideas. Sorry to be that blunt, but if the shoe fits- at least take a look at it.

  1. Fear, YES I said Fear

A fear that claiming any credit or incentive is jumping the shark with the IRS and certainly most of my manufacturing clients have enough scrutiny and regulations, that they certainly aren’t prone to invite more regulatory oversight unnecessarily. The fear thing, well it’s natural and is developed in all of us to govern behavior and preserve our lives, so we are by nature created with this emotion for a reason. That being said, this isn’t a fight or flight situation. So it should not freeze us like Elsa from Frozen (blatant Disney grandkid reference) in a business situation that can be assessed, measured, reasoned, and controlled to benefit our company and the families that work in it. Remember, middle market manufacturers create most of the jobs in your respective communities. So our government is helping you help them, which should not be a reason for fear.

  1. Cost/Benefit Uncertainty

This seems to be the main reason that clients don’t embrace the credit. To combat this, our firm has aligned with several engineering firms and specialty tax consulting firms that specifically do an upfront cost/benefit analysis to help clients assess the credit, do a rough estimate, and propose a plan to file and claim the credits. Generally, a rough estimate of the tax benefit can be attained before you start spending any consulting dollars with us or one of our specialists. If you are a Texas manufacturer- beginning in 2014 you also get to add to the analysis a bonus of a 5% credit against your Texas Franchise tax or margin tax on your gross margin. This can be used to offset up to 50% of your franchise tax in any year. Even my smaller manufacturers are seeing significant Texas credits in 2014 and 2015. Also, once you build the model you can repeat it in future years.

  1. Ignorance of the Law

Many leaders of manufacturing firms come from an engineering background, and they just want to know how things work before they dive in. They want to understand what it takes to qualify and how the credit is calculated. So to help with this natural curiosity- here is an example of the basic calculation of the Alternative Simplified Credit:

It’s the sum of your qualified expenses in the current year less (the average of the three years previous qualified expenses multiplied by 50%), which gives you the amount subject to the credit multiplied by 14% to get the actual credit amount.

Assuming you spent $280,000 of qualified activities costs( which is really easy to accumulate if you have any engineers and other smart guys on your management team, ( see the qualifiers below ) in 2014, and the average of your three prior years was say $100,000, then the delta would be $180,000 of qualified expense multiplied by 14% which equals $25,200. If you add the Texas credit to the federal credit that’s an additional $9,000 resulting in$34,200 in tax savings in one year. Better than a poke in the eye with a sharp stick.

So what kind of qualified expenses qualify- I found this great summation of the rules written for manufacturers in this article written by FreedMaxick CPA’s, a New York State firm that does quite a bit of R&D credit work. Here’s their summary and examples of the four qualifiers for the credit.

Four-Part R&D Credit Qualifier Test per FreedMaxick CPA’s:

  1. Permitted Purpose
    The activity must result in a new or improved process, function, product, performance, reliability, quality, or significant reduction in cost. Probably the most common type of activity overlooked by companies regarding these specific criteria involves significant improvements made to production-line operations. A very common example of this sort of improvement would be the updating of production-line capabilities by a manufacturer that ultimately improved efficiency, increased production capacity, and eventually yielded an overall reduction in costs. An example of this type of activity would be a company that manufactures heavy equipment, and relied upon a labor-intensive approach to production. If that company were to implement improvements in its manufacturing process, by way of automation or some other means that required investment in new equipment for the plant floor, then it’s very possible that the costs associated with the implementation of the new production process could be eligible for the R&D tax credit.
  1. Elimination of Uncertainty
    Were the activities conducted and intended to eliminate uncertainty concerning the development or improvement of a product? This criterion specifically involves the identification of information that is uncertain at the onset of the project or activity. Such uncertainty can relate to the capability of the product, the method used to produce it, or the appropriate design of the product. The examples that we typically encounter when consulting with clients in this arena deal with issues such as: Will the new or improved manufacturing process integrate with our current system, on any level? Will our new product development meet the customer specifications? Will the potential benefits outweigh the potential risks? Or will the new or improved product or activity even work?
  1. Technical in Nature
    Does the research fundamentally rely on the principals of, engineering, physical or biological science, or computer science? This criterion is usually a fairly easy one to deal with. What it really does is eliminate the soft sciences from the formal definition of technology. In other words, products or activities that are predicated upon literary, historical or social sciences do not qualify for the R&D Tax Credit. In all of our experiences, this technology criterion has never been an issue when performing an R&D study for a manufacturing company.
  1. Process of Experimentation
    Does the activity involve developing one or more hypotheses for specific design decisions, testing and analyzing those hypotheses, and refining and discarding the hypotheses? A key factor regarding the Process of Experimentation hurdle was recently crystallized, when Treasury Regulations changed the wording to evaluation of one or more alternatives. Previous language defined the process as evaluation of more than one alternative.

So now that you know the rules, you can quantify and control the risk, and you can rest assured you are in the fairway not in the rough. So, now it’s time to see if you have created enough innovation recently to qualify for the credit.

Alright then, my innovative bunch of manufacturers, we have one more year of certainty with the R&D credit and we have the ability to amend and claim up to three years of credits until you slide past your extended filing deadline. So as part of your yearend planning, capital expenditure budgeting, and tax forecasting for 2015 and projecting for 2016, please consider the R&D credit and look at the improvements you made to your business in 2014 and 2015. You more likely than not manufactured an R&D credit along with that bazillion widgets you produced for ACME Industries last year!

To find out more about R&D credits and other tools in the manufacturing tool box, or if you would just like to talk some things over about your manufacturing business, contact Gary Jackson, CPA at Cornwell Jackson, PLLC.

Blog post written by: Gary Jackson, CPA, Tax and Consulting Partner