February 2017
By Tracy Lustyan, alliantgroup Managing Director
Despite the reports of doom and gloom over the years, U.S. manufacturing is in the midst of a major revival.
But don’t take my word for it—just take a look at the latest numbers.
It’s been estimated that more than half of U.S. manufacturing leaders are looking at a 5% or more increase in annual revenue over the next 5 years. Combine this with estimates of an “Industrial Internet” market that will add $10 to $15 trillion to global GDP over the next 20 years, it’s clear the Industrial Internet of Things (IIoT) and the advancement of automated and system integration technologies will play a vital role in jumpstarting U.S. manufacturing during the coming years.
New Technologies, New Labor Needs
However, as is often the case when implementing new technologies, the prominence of IIoT has already had (and will continue to have) an immense impact on the type of workers that will be needed in factories across America. If they aren’t long gone already, the days of the old assembly line worker are clearly numbered. In recent years, the industry has shifted to the need for more technically-skilled, STEM-oriented employees—the kind that are able to design, develop and run what are now largely automated industrial processes and systems.
Unfortunately, considering the nation’s well-documented STEM labor shortage, the shift to more technical skillsets is one that many within the manufacturing and industrial sectors are not fully prepared for. In order for these new technologies to fulfill their economic promise, innovative companies implementing IIoT systems will need to be able to attract the best in what is already a thin supply of technical talent.
The U.S. government however has been paying attention to this trend, and has given innovative manufacturers, system integrators and industrial automation companies an avenue to grow and remain competitive in the marketplace.
The Tax Break That Could Save IIoT Companies
Even though the Research and Development (R&D) Tax Credit has been around for over three decades, the credit is perhaps one of the most misunderstood and under-claimed provisions of the tax code. It has been estimated that only 5-10 percent of eligible businesses claim the R&D Tax Credit—a troubling trend when you consider the credit is a) one of the most valuable tax breaks for U.S. businesses and b) an incentive that is clearly designed to reward the type of cutting edge innovation taking place in fields related to IIoT.
What Qualifies?
So, what exactly qualifies a company for the R&D Tax Credit? And why are so many businesses overlooking these savings? The answer to these two questions are related and go a long way in explaining not only the credit’s true intent, but why it applies perfectly to automation and system integration activities.
Technical Skills and Technical Employees
When people hear the words R&D, in my experience business owners have the habit of thinking only in terms of white lab coats, petri dishes or Silicon Valley startups. The truth however is that the R&D Tax Credit is also very much about incentivizing applied research—or rather, the technical work and experimentation that takes place behind a computer or on the factory floor to enhance products or processes.
As it relates to IIoT activities, it is the enhancement of automated and systematic processes that will traditionally lead to eligibility—be it the work that is done to increase the efficiency of an automated factory system or to ensure multiple systems within a facility work as one. As modern day manufacturing is trending more and more toward the implementation and integration of such systems, and considering the R&D Tax Credit is a wage-based, dollar-for-dollar credit that rewards companies for employing the kind of workers that can design and develop these systems, it’s easy to see the long-term intent of this credit—creating technical jobs and keeping those jobs on U.S. shores.
Generally, the more technical workers a company employs, the better the tax results for the company.
Real-World Success
To show the value of the credit in action, let’s take a real-world example.
A company that specializes in the development of custom robotic solutions received over $1 million in federal R&D tax credits for two years’ worth of qualifying activities. Among the company’s many qualifying projects, one included the development of an automated coating system at an onsite manufacturing facility for a client. Specifically, the company’s complete turnkey installation of the system included a robotic manipulator, integrated programming procedure and controls, as well as an integrated paint delivery and application process.
While implementing the system, the company had to overcome a number of design challenges—one of which related to the automated solvent cleansing system. During testing, the company found that if the paint process was interrupted in order to fill the paint pot with additional solvent, the paint would in turn clog the entire system. To solve this problem, the company tested alternative speeds at which the solvent filled the paint pot and determined the appropriate time for the solvent to enter the paint pot to ensure a complete painting process. Through testing and analysis, the company ultimately made the appropriate adjustments to ensure the paint never clogged the system.
In the end, this company’s employees found a technical solution to solve a client’s problem—a classic path to qualifying for the R&D Tax Credit.
Real-World Results
This company’s day-to-day activities allowed them to receive a game-changing benefit for their business—one that will allow them to purchase new equipment, hire new employees and further reinvest into improving their services. While not every business will receive such a result, companies performing IIoT activities are among the best candidates for the credit in terms of financial value as the U.S. government continues to reward the dynamic work taking place in this space.
Through the R&D Tax Credit, our government has invested greatly in ensuring the U.S. remains competitive in automated technologies and that high-paying technical jobs stay in American factories. If your company works in this space, you should be looking into the R&D Tax Credit—it could be the best decision you make for your business.
Tracy Lustyan is a Managing Director based in alliantgroup’s Chicago office. With Tracy’s guidance, more than 500 companies operating in diverse industries—including software, technology and systems integration—have claimed over $200 million in government-sponsored benefits. Tracy is passionate about government-sponsored tax incentives and the role they play in keeping jobs in the U.S.
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