job sample process and made note of issues, which in many cases would lead to pattern modifications, changes in gating, etc. Five per- cent of the employee’s compensation qualified. Farrar recognized several


qualifying positions in its machine shops, as well: • Lead Engineer. The machine shop lead engi- neer spends the majority of his time helping with design, planning how the jobs will run and what machines would be best utilized for each job. Eighty-five percent of his compensation qualified.


• Machine Shop Lead. Thirty percent of the employee’s compensa- tion qualified because he takes part in every job that runs on the floor. The employee constantly observes and makes recommen- dations on how to improve the process through workflow, tooling, use of perishables, etc.


• Main Set-Up. The position quali- fied at 5% because the employee initially determines how a job will run on a machine and often finds ways to cut cycle time.


Methods of Filing In October 2010, the Small Business


Jobs Act was signed into law. Accord- ing to the act, any company under $50 million in sales is eligible to apply for the R&D tax credit. (Larger compa- nies still qualify for the credit, as well.) Te act also broadened the defini- tion of qualified activities to include any manufacturer/remanufacturer, fabricator or company that has any type of internal processes, and for the first time in history, the credit can be used to directly offset the Alternative Minimum Tax. According to the terms of the


law, previous years can be re-opened and potential credits refunded with interest from the IRS. Before the Small Business Jobs Act was passed,


26 | MODERN CASTING June 2012


A portion of the salary of workers who improve the way a job runs through a metalcasting facility or machine shop can be claimed on the R&D tax credit.


any unutilized credits could only be carried back one year, then forward up to 20. With the passage of the act, the credits now can be carried back five years. Metalcasters have two options


when considering filing for an R&D credit. Te first method is known as the regular research credit (RRC), an incremental credit that equals 20% of a taxpayer’s current-year quali- fied research expenditures (QREs) that exceed a base amount, which is determined by applying the taxpayer’s historical percentage of gross receipts spent on QREs (the fixed-base per- centage) to the four most recent years’ average gross receipts. For taxpayers that had QREs in calendar years 1984 through 1988, that period is used to determine the fixed-base percentage. Te second option is known as


alternative simplified credit (ASC). Since 2007, taxpayers have been able to elect the ASC. For tax years beginning on or after Jan. 1, 2009, the ASC equals 14% of the QREs for the taxable year that exceed 50% of the average QREs for the three taxable years preceding the credit determination year. (For years prior to 2009, the ASC equals 12% of the QREs.) Election to claim the ASC


must be made on the origi- nal tax return and cannot be made retroactively. When determining


which method provides the best results, you must also take the availability of the components needed for the calculation into consideration. For instance, you would benefit from the ASC method if you had a high base amount under the RRC, incom- plete records to determine the startup base period, significant growth of gross receipts in recent years, or a history of mergers or acquisitions. When electing the ASC method, gross receipts can be removed from the equation if your data indicate a rising rev- enue stream. So what are considered


eligible QREs? Te costs eligible for the research credit as QREs must meet the definition set out in the Internal Revenue Code, which permits taxpayers either to deduct “research or experimental expenditures” or amor- tize the costs over a period of not less than 60 months. Tose expenses are limited to: • In-house wages and supplies attrib- utable to qualified research.


• Certain time-sharing costs for computer use in qualified research.


• Sixty-five percent of contract research expenses. Te 1986 Tax Reform Act targeted the definition of qualified research. To constitute qualified research: • The research must be undertaken for the purpose of discovering information that is technological in nature.


• Substantially all of the research activities must constitute a process of experimentation.


• The experimentation must relate to a permitted purpose. Tis definition is relatively broad


and encompasses such activities as: • Developing new or improved prod- ucts, processes or formulas.


• Developing prototypes or models.


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