The Research and Development Tax Credit saves U.S. businesses $10 billion every year and has helped value-added resellers to invest back into their businesses. Industrial distributors and value-added resellers who use innovative approaches to design, test, and produce are likely to qualify for government-provided tax incentives that can help their businesses take the next step toward success.
By Tracy Lustyan
Adding value. It’s a concept that isn’t just a namesake for value-added resellers (VARs) in the United States; it’s the very nature of the work that they do and the vast ways in which they improve upon their products and processes daily. Value-added resellers take product services or features and enhance them with new elements in order to sell an integrated product or turnkey solution to the end user.
In order to meet client expectations and increase their bottom line, both VARs and industrial distributors in the U.S. have worked tirelessly to create better efficiencies, reduce overhead costs, and improve their analytical competence.
A new wave of technologies has helped push forward the world in which VARs and industrial distributors work, and that’s the Industrial Internet of Things (IIoT). Businesses all over the world have joined in on this new trend, merging internet connectivity with physical devices to push their business forward.
In the same way that consumers have been able to integrate these types of technologies—such as smart thermostats and doorbells—in their homes, the industrial powerhouses of the U.S. have seized on the opportunity to leverage the IIoT to create better efficiencies and more output.
These devices have allowed systems used by VARs and industrial distributors to communicate with one another using cloud-connected devices that assist with both the production and delivery of particular products.
More Cost-Effective Solutions Available
In the last several years, the software programs that have enabled VARs and industrial distributors to thrive have not only become more nuanced, but also cheaper. The number of sales technology companies has grown from 300 in 2015 to 715 in 2017, and the software that is leveraged by VARs to increase output and efficiencies has become more intuitive and less costly.
American businesses are always looking for ways to enhance their products and processes in order to increase the value that they bring to consumers all over the world. Value-added resellers have helped American businesses for years by providing turnkey solutions through the improvement of processes and products using iterative changes and an innovative implementation of engineering methods.
On the other hand, distributors have worked through iteration after iteration of getting their products from “Point A” to “Point B” faster and more cost-effectively. These solutions are wrought from engineers, designers, and innovators who have leveraged advancements ranging from IIoT to automation technologies to help businesses deliver their products faster and more efficiently.
However, the benefits of these types of technologies used by VARs and industrial distributors extend to more than just higher, more efficient production rates. The steps that the engineers, designers, and innovators take to implement these advancements also can have an immediate financial impact.
A Reward for Innovative Work
In the 1980s, Congress, realizing the direct impact and potential that American businesses have to help strengthen the U.S. economy, created an incentive to reward the very type of work that innovators like VARs and industrial distributors do.
The Research and Development Tax Credit was enacted to encourage U.S. businesses to innovate and help our country’s economy thrive and remain a worldwide powerhouse. The idea was to reward these American companies for the time and resources exerted in order to help push their respective industries forward.
The R&D credit has greatly expanded over the years through judicial activity and legislative changes, including the most recent change, which eliminated the corporate alternative minimum tax (AMT) and curbed the number of pass-throughs subject to individual AMT. This expansion has kicked open the door for businesses of all sizes and created an opportunity for them to step forward and claim the credit, which, in turn, can be used to continue their important work.
For example, the PATH Act made the credit a permanent fixture of the U.S. tax code, ensuring that the businesses of our country can wholly rely on this valuable reward. The credit was also opened to startups through the startup provision, which allows businesses with gross receipts of less than $5 million a year to claim the credit (which is capped at $250,000) against their payroll taxes.
One of the primary shortcomings of the credit was that newer companies, which are more likely to take risks and invest in improving their products and processes, weren’t able to take advantage of the incentive.
A second change came with the AMT turn-off, which allows small businesses (defined as businesses with less than $50 million in gross receipts) to claim the R&D credit against their AMT.
The AMT was the single greatest barrier preventing perfectly eligible companies from claiming the incentive. Now that the gate has been lifted, small to mid-sized companies working in the plastics industry are able to benefit heavily from its removal.
Leveraging the Credit for Growth
The money that these American companies have been able to take in from claiming the R&D credit has gone toward several things that have helped elevate these businesses in their marketplace. From the hiring of new employees to the purchasing of equipment to strengthen the company’s ability to compete, these credits have done wonders for businesses.
Value-added resellers and industrial distributors are already taking advantage of the R&D credit, which is helping them to further strengthen their business as a whole. Here are a few common activities that have qualified these types of businesses in the past:
These are just a few examples of activities performed by businesses working as VARs or in the realm of industrial distribution that might qualify for this powerful government incentive. But the number of qualifying activities goes far beyond what is listed here.
Companies working in this space have repeatedly been able to successfully claim the credit based on the simple fact that VARs and industrial distributors are always working toward better efficiencies.
Repeat Success Stories for Claims
For example, one industrial value-added provider with an annual revenue of $77 million was able to claim a $1.7 million credit for work they did on a daily basis. Another example came when a pneumatic conveying systems provider with an annual revenue of $25 million reaped $1.3 million in credits for projects that involved qualifying activities.
Although not every credit will be this large, companies have the opportunity to claim significant amounts for work that they might not even realize qualifies for the credit.
One value-added reseller worked on several qualifying projects before claiming the R&D credit. One of the projects involved developing a custom valve automation system for the monitoring of valve positions at a facility. Specifically, the company was tasked with designing a continuous monitoring system to control the valves, requiring the development of built-in sensors and transmitters to allow the system to communicate with the entire building.
During the development phase, the company tested and investigated multiple existing systems and eventually determined the need to utilize brackets (along with sensors) that would identify the location of the valves. The company also evaluated several different communication components, including wireless transmitters and sensors, leading to the eventual decision to attach proximity probe sensors to the brackets to produce a reliable monitoring system.
Facing Real World Challenges
Finding technical solutions to real-world challenges is the key way that distributors, OEM channel partners, and VARs can qualify for the R&D credit. Although this particular example relates to the development of an automated safety system, companies within this space must often overcome the same issues when developing or improving upon standard automated or industrial systems.
The concept of research and development is, actually, more prevalent within a niche industry than the average VAR or industrial distributor might realize. The reasons are simple: What all these companies have in common is a commitment to improving products and processes—the exact type of behavior the R&D tax credit was meant to incentivize.
The R&D credit is one of the most valuable provisions of the tax code and is a tool for small- to mid- sized businesses to use in order to strengthen their own business and, in turn, the U.S. economy. Businesses working as a VARs or industrial distributors should take note and claim this incentive that is rightfully theirs. They play an integral role in the upward movement of the American economy and, in turn, should reap the rewards available to them.
About the Author
Tracy Lustyan is a managing director for alliantgroup (https://www.alliantgroup.com), a provider of specialty tax services. She is based in alliantgroup’s Chicago office and focuses on clients in the Midwest, primarily Illinois, Missouri, Minnesota, and Iowa. Tracy offers vast knowledge of government-sponsored programs, with concentrated expertise in the business application of the R&D Tax Credit, IC-DISC, SUT, DPD, energy credits, and tax controversy services.
Tracy is passionate about the importance of spreading the word about government-sponsored tax incentives and the role they play in keeping jobs in the United States. Since 2010, she has partnered with more than 120 CPA firms to uncover significant tax savings for clients in the Midwest and Great Lakes region. With Tracy’s guidance, more than 420 companies operating in diverse industries—software, contract manufacturing, systems integration, architecture, engineering, construction, and more—claim government-sponsored benefits.
Tracy is a graduate of California Polytechnic State University at San Luis Obispo. She can be reached at firstname.lastname@example.org; phone: 312.386.9770.