Lean Manufacturing May Qualify for Federal Investment Tax Credit - Section 41 of IRC

Lean Manufacturing May Qualify for Federal Investment Tax Credit - Section 41 of IRC

“To keep our nation leading the world in technology and innovation, we’re extending and modernizing the research and development tax credit. By allowing businesses to deduct part of their R&D investments from their taxes, this bill will continue to encourage American companies to pursue innovative products, medicines, and technologies.”

George W. Bush
While signing the Tax Relief Act of 2006 The White House December 20, 2006

President Bush’s concern for the men and women who work in manufacturing and the critical contribution they make to the U.S. economy is the driving force behind this tax relief and health care act of 2006. Manufacturers are full partners in the effort to build the future of the country in the marketplace for new products and ideas. Simply put, a healthy manufacturing sector is key to better jobs, fostering innovation, raising productivity, and higher standards of living in the United States.

Section 41 of the Internal Revenue Code (IRC), defines “Qualified Research” more broadly than some may think. Section 41 rewards manufacturers for keeping manufacturing and engineering jobs in the United States and Lean manufacturing activities may qualify!

The words ‘Research & Development” creates an image of scientists in white lab coats in sterile laboratories doing advanced research using expensive equipment and instruments. The IRS definition of eligibility under the R&D Tax Credit program is much different. Under the IRS guidelines, if you are developing, designing, testing new processes or products, or improving existing processes or products, which many Lean/Kaizen projects accomplish, your company may qualify. If your Lean/Kaizen projects have devoted resources to evaluating a new technology, investigating new materials, improving machinery or tools, developing and implementing lean manufacturing techniques, or improving the environmental impact of your processes, your company may be eligible for the R&D Tax Credit.

Both large and small companies are potential candidates for the credit. If you are doing things in your business to remain competitive in the global marketplace and designing or developing new or improved processes or products, you may be eligible for the credit. The R&D Tax Credit program is in place to reward and encourage Lean-Innovation amongst all U.S. businesses and it is particularly beneficial to the smaller companies who take a proportionally greater risk in staying competitive.

An overview of IRC Section 41

- Provides a credit against federal tax due equal to 20% of qualified research expenditures over a certain base amount plus 20% of certain qualified basic research payments.
- Net yield of credit on federal level is approximately 6.5% of qualified expenditures. (State credits may provide additional funding.)
- Companies may go back and amend returns up to three years

For additional information on IRC Section 41, please contact your tax adviser.