The Hidden Advantages of ISO Certification

How R&D Tax Credit Can Be Useful When Implementing ISO

Also known as the Research and Experimentation (R&E) tax credit, the R&D tax credit was introduced in 1981 under Internal Revenue Code Section 41 as ‘The Economic Recovery Tax Act (ERTA)’ due to the widespread concern that U.S. economic performance had fallen well below its expected potential. The hope was that the ERTA would function as an economic stimulus to encourage investment within the United States.

During this time, the country’s decrease in economic growth, productivity gains, and competitiveness within the global marketplace were perceived by congress to be due to research spending declination. The credit was created to reduce the decline in U.S. research spending by providing an incentive that was premised on benefiting an increase in year-over-year research spending.

Companies had to create or produce a new product, process, formula, software, technique, or invention to qualify for this tax. This qualifier means that companies can claim R&D Tax Credit from the cost of implementing ISO to improve processes and quality in their business.

ISO Standards that could be applied to the R&D credit process include:

• ISO 9001 – Quality Management
• ISO 13485 – Medical Devices
• IATF 16949 – Automotive
• AS 9100 – Aerospace
• ISO 14001 – Environmental
• ISO 45001 – Health & Safety
• ISO 17025 – Laboratory
• R2v3 – R2 Recycling Certification
• ISO 50001 – Energy Management
• ISO 27001 – Data Security
• Managed Support Services of an ISO

Substantial cash refunds and future tax savings may be available for businesses that hold an ISO certification. For example, ISO 9001 includes the implementation of continuous improvement and process improvements that streamline quality controls. Adopting an ISO standard is one of the significant qualifiers companies need to be able to claim the R&D tax credit. ISO Certifications are classified as a process improvement, a QRA (Qualified Research Expenses).

R&D Tax Credit Requirements.

A company or business considering claiming R&D Tax credit only needs to meet four simple criteria based on Qualified Research Activities (QRAs): engineering, process improvements, custom manufacturing, product improvements, design work, and many others.

Permitted Purpose: The company must attempt to develop a new or improved product, process, software, technique, invention, or formula. The changes made must try to increase performance function, reliability, or quality. However, the company does not need to achieve improvement or invention. Even if their efforts fail, they can still qualify just for attempting.

Technological in Nature: The process of experimentation used to discover information must fundamentally rely on the physical or biological hard sciences. Hard science refers to physics, biology, chemistry, engineering, or computer science.

Elimination of uncertainty: The taxpayer must aim to discover information meant to eliminate uncertainty pertaining to the capability or procedure of developing or improving what was sought out or the appropriate design. For example, a company might not know whether they can or how they can create a product or not see its creation at the start. However, their efforts should seek to clarify in that direction.

Require experimentation: Activities must undergo some experimentation to eliminate or resolve the technical uncertainty. This process will involve evaluating alternative solutions or approaches and is performed through modelling simulation, systematic trial and error, or other methods.

In the US, Which States Can Claim R&D Tax?

The R&D tax credit is administered at the federal and state level, with approximately 38 states in the U.S. offering a credit to offset state tax liability, even though the qualifications and rewards vary. These states include:

• USA – Alabama
• USA – Alaska
• USA – Arizona
• USA – Arkansas
• USA – California
• USA – Colorado
• USA – Connecticut
• USA – Delaware
• USA – Florida
• USA – Georgia
• USA – Hawaii
• USA – Idaho
• USA – Illinois
• USA – Indiana
• USA – Iowa
• USA – Kansas
• USA – Kentucky
• USA – Louisiana
• USA – Maine
• USA – Maryland
• USA – Massachusetts
• USA – Michigan
• USA – Minnesota
• USA – Nebraska
• USA – New Hampshire
• USA – New Jersey
• USA – New Mexico
• USA – New York
• USA – North Dakota
• USA – Ohio
• USA – Pennsylvania
• USA – Rhode Island
• USA – South Carolina
• USA – Texas
• USA – Utah
• USA – Vermont
• USA – Virginia
• USA – Wisconsin

The quantity you can claim and collect depends on the location of your business. 2014 shows that 17,824 taxpayers claimed $12 billion in federal R&D tax credits in the U.S. in 2014. However, only 5% of qualified companies actually end up claiming R&D tax credits!

Many industries qualify for the credit, such as technology, manufacturing, engineering, and life sciences. Among the many others include:

• Automotive
• Consumer goods
• Aviation & aerospace
• Retail & eCommerce
• Food & beverages
• Biotechnology
• Oil & energy
• Financial services
• Telecommunications
• Renewables & environment
• Apparel & fashion
• Logistics & supply chain
• Craft beer companies
• Cannabis companies
• Farmers & agriculture
• Advertising/marketing analytics
• Logistics

If you are a company or business, whether big or small, which…

• Develops or designs new products, including software
• Improves your existing products or processes
• Acquires patents or intellectual property
• Conducts research which could lead to new knowledge

Then you should apply for the R&D tax credit, which could qualify you to claim back approximately 6-14% of your qualified spend and could entitle you to a $60k-$140k credit.

You and your company may be able to qualify expenses such as employee salaries, supplies, computer leasing, contract research and many more.

The Advantages of claiming R&D Tax Credits

• Instant cash: For small and middle-sized companies, the R&D tax credit is money you can reinvest immediately
• You can benefit now and in the future: By decreasing your current and future state and federal tax liabilities
• Credits can carry forward 20 years: You can take the credit for all the open tax years – usually the last three or four years, plus the current
• Reduce payroll taxes: Even if you are operating with losses, you can use the R&D tax credit to offset some of your payroll taxes
• It is widely available: In 2014, more than $12 billion in U.S. federal credits paid out. About 80% of that goes to the country’s largest companies

To claim R&D tax credits, this will mean keeping reports on receipts, as well as a record of:

• An overview of the company
• Activities that the company performs
• Project analysis
• Quantitative information like gross receipts, expenses, and revenue information
• Credit calculation

Supporting documentation may also include:

• Requirements
• Specifications
• Project lists
• Project notes
• Contracts for R&D
• Design drawings
• Design requirements
• Design specifications
• Internal presentations
• Management notes
• Patents
• Project plans
• Project status summaries
• Prototype drawings
• R&D budgets
• Test plans
• Test results

The documentation requirements may vary depending on your business’s state and jurisdiction. These variations can include thresholds, forms, pre-certifications, and paperwork.

The focus on innovation and continuous improvement is recognized more than ever for businesses to survive in a global economy. Therefore, Congress has increased incentives designed to reward companies focused on innovation, improvement, and cost reduction without sacrificing quality. Having an ISO certification such as ISO 9001 clearly shows a company’s commitment to its continuous improvement ethos, and implementation proves this.

If you are interested in gaining an ISO certification, contact us and speak to one of our trained consultants today.

For more information, please see below:

1. Documentation: Essential to the R&D Tax Credit – Specialist R&D Tax Advisors (swansonreed.com)
2. It’s Your Money, Keep More of It (CrossBorder Solutions)
3. Hidden Benefits of ISO Certification (nqa.com)