There are number of issues related specifically to filing R&D tax credit claims within the Machinery and Equipment Manufacturing Industry. In general it is not relevant whether the equipment manufactured is sold, or transferred to production. This is important because people often start with the premise that R&D eligibility is limited to projects that experienced significant cost overruns, or which failed i.e. could not be sold or transferred to commercial production. It is conceivable a project could be at or below budget in terms of cost and still qualify for R&D tax credits. The ultimate success of the project and the amount of money spent are indicators that may bear on deciding if the project met the requisite technical criteria, but they are not conclusive.

The Strategy
Keep an open mind. Do not limit thinking to only projects which experienced significant cost overruns, or which failed.

Determining the “envelope of R&D”

Only activities within the “envelope of R&D” potentially qualify for R&D tax credits. Defining the size of this envelope involves considering several factors. The beginning of a project typically occurs when the technological objectives are determined. Few companies will formally define a hypothesis and test it in the classic scientific model sense. Intuitive thought can replace a formal hypothesis if there is a concept that can be formalized to form technical objectives. The development cycle may involve several iterations of machine versions or components. Projects may stop and start again over time. Completing a project to arrive at a conclusion may require field-testing. This would typically be at or near the conclusion of the project.

The Strategy
Definition of the “envelope of R&D” requires careful thought. The size of a claim is dependent on the size of the envelope. Consider the boundaries of the envelope in defining the scope of your R&D project.

Start up production costs

R&D work must be distinguished from troubleshooting. The work generally associated with trouble-shooting, debugging, and fine-tuning after the start-up of any new equipment, process, or technology would generally not be R&D. However, work done after the start up of new equipment may be directed towards resolving technological uncertainty. This work would likely be R&D.

The Strategy
Where start up is particularly problematic, there may be a case to be made that R&D work has commenced or is ongoing. Review the characteristics of production start up activities for the existence of technological advancement and uncertainty.

System Uncertainty

System uncertainty is scientific or technological uncertainty that results from the complexity of a system rather than uncertainty about how its individual components behave. For example, in a complex machine, the characteristics of individual components are fixed, but there can still be uncertainty about the best way to combine those components to achieve an overall effect. However, assembling a number of components to an established pattern, or following routine methods for doing so, involves little or no scientific or technological uncertainty.

Similarly, work on combining standard technologies, devices, and/or processes can involve scientific or technological uncertainty even if the principles for their integration are well known. There will be scientific or technological uncertainty if a competent professional working in the field cannot readily deduce how the separate components or sub-systems should be combined to have the intended function.

Companies in this industry sector often manufacture equipment that can be rationally viewed as made of a number of major components. Some of these components may be well understood by the client and their manufacture would not in and of themselves generate R&D tax credits. However the integration of these components may carry a major element of technological uncertainty; this may be called a system uncertainty.

The Strategy
Projects in the machinery and equipment industry may involve system uncertainty. The existence of system uncertainty can significantly expand the envelope of R&D.

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