ditures depends on the nature of the activity to which the expenditures relate. Neither the nature of the prod- uct (or improvement) being developed, nor the level of technological advance- ment matters when making this determination…R&D expenditures generally include all expenditures inci- dent to the development or improve- ment of a product. R&D expenditures include the expenditures of obtain- ing a patent, such as attorney’s fees expended in making and perfecting a patent application.” To determine the extent of its
qualifications, Farrar hired consulting firm Paradigm Partners, Houston, to perform the engineering study. Te firm required a listing of employees and job descriptions, interviewed numerous employees and asked for specifics on some of the jobs they have worked on. At Farrar Corp., the goal was to find areas of the company that contributed to the “design, devel- opment or improvement of products, processes, techniques, formulas or software.” Several areas in the com- pany’s metalcasting process were good candidates. Farrar operates its own pattern shop and offers customers design assistance, in some cases complet- ing 100% of the casting design. To determine how much of this expense could be claimed for purposes of the R&D credit, the company evaluated each employee in the pattern shop. It found a major portion of the staff’s time is spent on designing, developing and improving products. Tat portion of their compensation goes into the calculation for credit. Farrar experienced a high number
of qualifying employees. Te number may vary from plant to plant. Te credits can be captured for several years in the past, so the initial fil- ing will be the largest. Te following employees qualified in Farrar’s pattern shop: • Pattern shop supervisor at 90%.
• Patternmaker at 90%. • Pattern apprentice at 50%. In the engineering depart-
ment, several Farrar employ- ees help develop or improve
While quality control testing does not qualify for the R&D tax credit, quality assurance personnel perform many activities that improve processes, enhance part design and make modifications to improve performance
processes or customer products. Te following employees qualified at rela- tively high rates: • Manufacturing engineers at 90%. • Tooling engineers (metalcasting facility/machine shop) at 30%. Because the IRS indicates quality
control testing does not qualify for the credit (Table 1), some companies miss the opportunities in this area. How- ever, quality assurance professionals perform many activities that improve processes, enhance part design and make modifications to improve perfor- mance. Te study concluded with the
Table 1. Items Excluded From R&D Tax Credit Quality control testing Consumer surveys
The acquisition of another’s patent, model, production or process
Management Studies
following employees qualifying: • Quality assurance coordinator (manager) at 80%.
• Quality assurance technician at 50%. Next, Farrar examined production
Advertising or promotions Efficiency surveys
Research in connection with literary, historical, or similar projects
areas in its metalcasting and machine shops, keeping in mind the criteria of designing, developing or improving products, processes, techniques, formu- las or software. Te following positions qualified for credits: • Cleaning Room Lead. Farrar installed new equipment in its cleaning room to eliminate the use of snag and hand grind- ers. This resulted in process improvements due to increased productivity and safety. There- fore, 5% of the department lead’s compensation qualified. • Molding Lead. The molding lead provided feedback to the pattern shop during the new
June 2012 MODERN CASTING | 25
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