The R&D Tax Credit Aspects of Design Firm Start-Ups



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design-firm-startups
        Industrial design is the creation of products and systems to optimize the functional and aesthetic qualities of a product that provides the very best for customers. Designers are responsible for incorporating the function, aesthetics, and production use when developing new product concepts.

        The typical process of designing a product includes devising an idea, producing sketches, developing prototypes, and testing the product. Modern technology that is now available creates an opportunity for designers to develop innovative and creative products all while receiving Research and Development tax credits. 


The Research & Development Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of Uncertainty
  • Process of Experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 18, 2015, President Obama signed the bill making the R&D Tax Credit permanent. Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and startup businesses can utilize the credit against payroll taxes.


Crowd Source Funding

        With the rapid growth of crowdsource funding  to raise capital, expanding 3D printing capabilities, and complete suites for cloud business services , product designers are now in a unique position to start their own businesses.

        Crowdfunding can serve as a useful tool to receive valuable feedback from the public about new ventures. By analyzing people’s responses, companies can more accurately identify the needs of buyers and in turn improve their products. Popular crowdfunding sites where this can be achieved include Crowdfunder, Designer Fund, MicroVentures, RocketHub, and Kickstarter.

        As of January 1, 2016, the federal government provides up to $250,000 per year in payroll tax credits for product designers’ new product and process investments.


The Tax Law Changes

        The new federal tax law changes offer various benefits to startup companies. One change is that the credit was revised to apply credits in excess of income taxes to FICA tax liability.   Companies who own gross receipts that are under $5,000,000 are able to take a credit against payroll taxes if before the five previous taxable years there were no gross receipts for any taxable year. The highest credit amount a startup may obtain is $250,000 per year for a duration of five years.

Tax Credit Example
        A company owes $300,000 in payroll taxes, yet they qualify for $100,000 in R&D tax credits. The R&D credit acquired can be applied to the payroll taxes. Therefore, the amount of the payroll tax that has to be paid is reduced to $200,000. If the company qualifies for $300,000 in R&D tax credits, the most that can be deducted from the payroll tax is $250,000. So, the company would still owe $50,000 in taxes.



3D Printing Empowers Designers

        The rapid growth of 3D Printing technology  empowers the product design industry.  The virtually limitless horizon of human imagination is expanding 3D printer functionality across numerous industry sectors. 

        The expanding 3D printing  product capabilities includes human organs, skin, metal products, plastic products, food, furniture, and apparel.  One of the strongest growth areas for 3D printing revolutionizing the industry is in aerospace. In the aerospace sector, there is a particular need for numerous lightweight and custom shape parts and products.  Moreover the multi-tier supplier base has an aging technical worker population that is challenged to face today's product demands. 3D printing has a large influence in the product design industry, and is perfect for capturing research and development tax credit incentives.

        Autodesk, Inc. offers 3D product design software called Product Design Suite. The program provides users with tools such as simulation, visualization, and digital prototyping.  2D AutoCAD drawings can be used in the program as a design base layout. Product designers can assess functionality in their design by using sketch geometry. The designs can easily be edited and improved with tools provided in the program.

3D Printed Furniture
        Norgaard Designs is a home and office product design firm based in Denmark that provides companies with furniture and lighting designs. The company decided to utilize a 3D printer to modify their design process and increase sales.

        A Dimension 3D printer used ABS plastic to create 3D models that allow employees and clients to analyze designs to test for reliability and durability.  Since utilizing this 3D printer, Norgaard Designs saw a 25% increase in the sale of products. This is largely the result of having the ability to produce products much quicker.

        Drawn is another start-up located in France that offers customers the ability to create their own furniture. Sylvian Charpiot, the founder, developed a 3D printer called Galatea to build their products.  The company builds furniture based on a customer’s request for certain elements, such as color, dimensions, shape, and materials.


The U.S. Strong Product Design Education Base

        Many top U.S. universities have product design programs where recent grads can use today's resource-rich environment to jumpstart their own business. Students who major in product design focus on the areas of Science, Technology, Engineering, Art and Math (STEAM).

        Undergraduates build 3D models, use CAD programs, and learn about materials and packaging in order to understand how to design a wide range of products. The tools and skills obtained from a college education in product design give individuals a competitive advantage and the opportunity to be successful in the design industry. Listed below are the Top 30 Product Design Universities:






Conclusion

        The revision and extension of the PATH Act of 2015 gives product design startups a greater opportunity to collect research and development tax credits. Many startup companies use business accelerators to further enhance their development process.  There are many universities in the United States that offer some of the best product design programs for students to concentrate in. With the emergence of modern technology, such as 3D printers, new product design companies will continue to emerge and release new products.


Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Daniel Audette is a Senior Tax Analyst with R&D Tax Savers.

Lauren Chin is a Tax Analyst at R&D Tax Savers.


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