R&D Tax Credits Can Be Fashionable

The apparel industry is likely one of the most competitive industries on earth. U.S. companies are competing with firms from all over the globe. There is a race to shorten the "concept to commercialization" phase, which already takes a small fortune in investment. Fortunately, many activities that occur between concept to commercialization may qualify for the Research and Development Tax Credit.

Of course, every case requires a "facts and circumstances" test; examples of types of activities that may qualify for the credit include:
  • Developing new and improved clothing, footwear and related gear
  • Developing new/improved sewing, sealing, material joining/adhering, "welding," manufacturing technologies and processes
  • Developing new/improved fabrics, materials, compatibilities and chemical reactions
  • Developing fitness for use and product technical specifications
  • Developing product, fit, construction and manufacturing specifications
  • Developing performance and testing procedures
  • Developing first articles/prototypes and testing
Most of the credits are claimed by Fortune 500-type companies; many small- to mid-sized businesses that may be eligible to claim such incentives often do not. This is likely due to 1) not knowing about them, 2) not believing the incentives apply to them, or (3) lacking expertise to document and substantiate qualifying projects, costs and activities.

The R&D Tax Credit was designed as a "brain-magnet" of sorts to encourage a certain kind of company spend. Traditionally thought of as only applying to inventions and patentable ideas, it is much more expansive and can apply to companies that are developing new and improved products and processes, as well. Certainly, fully or partially-integrated apparel companies are candidates for R&D, but so are "black-label" manufacturing companies. Many apparel manufacturing companies manufacture apparel, textiles and shoes on behalf of customers and have no products of their own, per se, but their process development and improvement activities may qualify for the R&D tax credit.  As such, not having their "own" products does not necessarily eliminate these companies from being eligible for the R&D tax credit.

Brady Bryan is CEO of BRAYN Consulting LLC, a consulting firm that supports CPA firms and their clients in taking full advantage of various incentives, including Research & Development tax credits. The team is comprised of R&D experts with backgrounds in Big-4 accounting, the IRS, and other national tax firms.

IRS Circular 230 Disclosure - To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
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