SPECIAL REPORT: MANUFACTURERS' TAX CREDIT CAN HELP FILL CREDIT VOID

There?s no secret that the lack of credit for businesses is hurting our economy and the unemployment situation.

For example, Parker-Hannifin Corporation said in The Wall Street Journal that it boasts an untapped credit line of $1.5 billion. However, CFO Timothy Pistell says that the inability of Parker?s customers to get loans has contributed to a collapse in demand for its hydraulic equipment that is used on everything from bulldozers to airplanes.

Many companies will just have to wait until the banks begin lending again. However, some manufacturers may have an opportunity for a cash windfall to temporarily get them past the credit freeze.

PUT CASH IN THE BANK WITH INTEREST IN 120 DAYS
What if you could get cash back with interest from the IRS within 120 days, would that help? What if that extra cash back ranged from the tens of thousands to the hundreds of thousands of dollars? Would that extra cash give you the opportunity to make an investment in equipment or expansion? Or could you use the extra cash for other purposes to help your company?

How is this possible? Most manufacturing firms are missing out on five-, six- or seven-figure manufacturing credits. The existing R&D Tax Credit is overlooked because most manufacturers do not understand that their every day activities already qualify them for the credits. And in most cases, the CPA doesn?t understand either, because it requires very specialized knowledge . . . and that's why they have never approached management.

It takes a team of specialized tax engineers and IP attorneys to understand which activities qualify, and to create the documentation to substantiate those qualifying activities.

DO YOU QUALIFY?
When thinking about research and development, most people conjure up the traditional image of people in lab coats, tinkering with chemicals in ultra high tech industries and Fortune 500 type companies. However, the definition that was adopted by the IRS in 2001 is substantially broader than this, with changes so major that they virtually encompass every manufacturing or technology company in some form or fashion.

These changes address the fact that manufacturers across the country design new products on a day-to-day basis. If not, they are improving existing products or, alternatively, they are developing new processes or making improvements to the existing processes by which they manufacture those products. Most of these companies do not have a formal R&D department and, in fact, most are not doing this sort of work with the thought in mind that they are performing ?R&D?. They are doing this just to stay competitive in their respective industries ? the exact type of activity the government is seeking to reward with the R&D Tax Credit.

How does this apply to the fabricators and machine shops in the metalworking industry? In a myriad of applications. Here are just some of the everyday activities that qualify for the tax credit:
? Designing the process to fabricate the metal to reduce shrinkage and increase its quality
? Programming CNC machines
? 3D CAD engineering with software programs like SolidWorks, etc.
? Developing and testing of prototypes
? Quality Assurance: First-piece quality inspections
? Designing and developing of specialty tooling and fixtures
? Evaluation of alternative metals to develop the product
? Evaluation of different metal thicknesses
? Developing engineering drawings
? Developing weld procedures
? Bending of metal (e.g. sheet metal) to evaluate the material stress and stretching characteristics
? Evaluation and testing of final product strength for application (to meet specifications)

The R&D Tax Credit is a wage-based credit. If you take into account that all of the above activities qualify and that supporting and supervising activities may also qualify, the credit can be substantial.

Why do you get cash back? The IRS recently changed the rules allowing companies to go back three open tax years and take the credits they missed. One hundred twenty days after submitting amended returns, you will get cash back with interest. And, of course, you can take credits for current and future years if you continue to perform similar activities.

Should your company take a look at this?

By the very nature of your business, all fabrication and metalworking manufacturers have qualifying activities. The real question is whether you can actually use them. To help determine the answer, if you can respond ?yes? to all of these questions, then you definitely need to have an R&D Tax Consulting firm provide you with a free estimate of your tax credits:
(1) Were you profitable in 2006, 2007, 2008 and/or 2009?
(2) Is your average annual payroll for 2006, 2007 and 2008 in excess of $2.5 million?
(3) Is your company structured as a C Corporation? If so, that is good. If you are structured as a ?flow-through? entity like an S Corp or partnership, do you have 5 or less shareholders? If so, that is good, too.

If you answered yes to those three items, then your company has an excellent possibility of having a high five-figure credit, and into the six- or seven-figure credits for companies with larger payrolls. As mentioned before, the R&D Tax Credit is a wage-based credit so the higher your total wages, the higher your credits. Think about what your company can do with the extra cash in about 120 days.

Here are some example credits:

Average Annual Payroll of $3.5 Million
Net Credit Benefit for 2005 through 2008 tax years: $200,000

Average Annual Payroll of $6.5 Million
Net Credit Benefit for 2005 through 2008 tax years: $500,000

Average Annual Payroll of $11.5 Million
Net Credit Benefit for 2005 through 2008 tax years: $700,000

Average Annual Payroll of $19.5 Million
Net Credit Benefit for 2005 through 2008 tax years: $1,200,000

CONCLUSION
The current credit crunch is hurting manufacturers that are trying to expand or just stay alive and keep valued employees. You can decide to wait until the banks begin lending again, or you can choose to take advantage of an existing tax credit to bring in needed cash fairly quickly.

Even if bank credit becomes more readily available, you should still look into this great tax incentive because your company will be getting back money from the IRS that you have been overpaying in taxes the last three years ? and you?ll be going forward as well.

Seek out an R&D Tax consulting firm to determine if you qualify and to give you an estimate of your R&D Tax Credits. The sooner you do this, the sooner you'll have additional funds to invest in your company.

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Karim Solanji, J.D., is a director and Mark Lauber is the vice president of marketing at Paradigm Partners, Inc., 1500 S. Dairy Ashford, Suite 240, Houston, TX 77077, 281-558-7100, Fax: 281-558-7900, www.ParadigmLP.com.

Paradigm Partners is a national tax consulting firm specializing in niche tax services such as the R&D Tax Credit, the IC-DISC (U.S. Exporters' Tax Incentive), WOTC (Federal and State Hiring Tax Incentives), Section 179 and Cost Segregation.