The marine industry is no stranger to uncertainty. It is also facing significant challenges due to environmental concerns, as well as changes in the way people spend their recreation time. Consequently, boats are becoming more powerful, more luxurious and more energy efficient, all at once.
Innovation is at the forefront of these changes. Boatbuilding projects, including government vessels, commercial ships and recreational boats — and some third-party consultants such as marine architects — can and do frequently qualify for research and development tax credits, but the qualified activities and expenses must be correctly identified and documented.
The R&D Tax Credit, Explained
The R&D tax credit is a dollar-for-dollar tax savings that directly reduces a company’s tax liability. It often is called a subsidy by federal and state governments. No limitation exists on the amount of expenses and credit that can be claimed each year. If the R&D credit is not used immediately or completely, any unused credit can be carried forward for up to 20 years. In addition, previously filed tax returns can typically be amended for up to three years to claim the R&D credit retroactively, providing an avenue to recoup previously paid federal and state taxes.
The high costs required to design and build first-in-class vessels or prototype hulls can often lead to substantial R&D credits. Depending on company size and the types of activities performed, boatbuilders have saved $50,000 to $5 million through R&D tax credits, immediately minimizing the tax liability of the company.
The amount of R&D credit is based on the amount of qualified research expenses determined to be eligible. Generally, the R&D credit is approximately 10 to 15 percent of a company’s development expenses during a given year, and this can be much higher when state credits are factored in.
What Does the R&D Tax Credit Cover?
Generally, two types of activities may qualify for the R&D credit: developing new or improved products, and developing new or improved processes.
Technically challenging projects that require the design and development of new or improved products or services, or new construction techniques, usually have expenses eligible for the credit. With safety, quality and cost-efficiency being top concerns for the industry, many companies are investing significant dollars in the development of new equipment, products or manufacturing processes.
The presence of technical uncertainty is one of the primary qualification criteria for the R&D credit. For example, companies that take on technically challenging projects, such as conceiving and producing new or improved hulls, on-board systems and components, or new construction, generally have expenses eligible for the credit.
Some examples that may qualify include the design of new hulls or improvement of existing hulls, including custom builds; the development of new or improved construction techniques such as resins, glass fabrics, layup processes or joining and welding techniques; the design of new or improved internal systems such as propulsion or electrical systems; and the design of more-efficient manufacturing processes.
How To Apply
For businesses interested in taking advantage of the R&D tax credit, the first step is to plan an analysis of the types of projects the company is working on. The key is to find an analyst who understands not only the marine industry, but also the rules surrounding the R&D tax credit. The boating industry has an especially complicated legal history with determining qualified expenses, so it’s important for your adviser to have a deep knowledge of how to navigate the process.
Each company’s goals, values and resources are unique, which makes it important to develop a customized project plan to identify, calculate and support a company’s R&D credits and activities. With recent increased Internal Revenue Service scrutiny around R&D credits, it’s crucial to understand what’s necessary to substantiate a credit claim.
Ronald Wainwright (email@example.com) is a strategic tax partner with Cherry Bekaert’s tax credit and incentives advisory practice.
This article was originally published in the February 2022 issue.