Episode 10

Published on:

4th Sep 2023

Maximizing ROI in Manufacturing: The Hidden Opportunity of R&D Tax Credits with Casey Barka

Connect with Casey Barka:

Website: www.striketax.com

LinkedIn: https://www.linkedin.com/in/caseybarka/

Lisa Ryan:: Hey. It's Lisa Ryan. Welcome to the manufacturer's network podcast. I'm here today with Casey Barker. Casey is an R&D tax credit expert with 20 years of industry knowledge and nine years of proven experience calculating R&D tax credits for major accounting and financial service firms. Before co-founding Strike, Casey spent eight years in the petrochemical industry in Houston, Texas. His distinguished knowledge of the dynamic properties of polyethylene polypropylene and styrene-butadiene copolymer resins drove significant department improvement. I'm glad I got all those out. And, Casey, welcome to the show.

Casey Barka::: Thank you very much, Lisa. Glad to be here.

Lisa Ryan:: share a little about your background and what led you to do what you're doing.

Casey Barka:: I hail from the great state of Wisconsin originally. My bachelor's is actually in biochemistry and molecular biology. I had hopes and aspirations of going into the medical field. And as life hands you lemons, I went to the army and traveled the world for a few years. Happy to have served my country there. And after that, I found my way to Houston, Texas, an oil and gas hub. It was a very natural landing place for me. I spent 8 to ten years with various large Chevron Total big names in the industry, primarily focused on plastics and polymers; as you mentioned, I got my MBA as I worked up the corporate ladder. I just happened upon a job posting for research and development Credit Consulting, and it hurt my interest. And as the story goes, here we are ten years later. I co-founded Strike Tax Advisory, headquartered in Boise, Idaho. I am leading part of a team here in Houston. And, yeah, really excited to talk to your group about how R&D tax credits can benefit the manufacturing industry.

Lisa Ryan:: Let's start at the very beginning. What is an R&D tax credit? And how does it relate to manufacturing? Why do we care?

Casey Barka:: Okay. Good question. For those of you that may not be familiar, the research and development tax credit, its common name, officially, is the credit for increasing research activities. This is section 41 of the Art of the tax code. It's been around since the early eighties. That's a Ronald Reagan-era credit. It was meant to incentivize US-based companies to keep those high-tech, high-paying jobs here in the US as opposed to being offshored to that was the primary driver. It's technically a glorified jobs credit if you want to get down to it. Over the last 40-plus years, there have been many changes to the tax code itself.

There's been a lot of judicial precedent that has been established that goes into what is R&D and what is not R&D. That's primarily our job is to help our clients determine what expenses they are incurring on what we consider to be an R&D project. That can be anything from a product. It can be a process. It can be a formulation, invention, or technique. It can be it's an extensive bird. Not only to the manufacturing industry but also applies to many food and beverage architecture, engineering, medical, and pharmaceutical software; we work with many different industries. Manufacturing is the number 2 or 3 industry we work with here at Stripe. And as you're getting into manufacturing itself, there are many sub-industries that we work with. Everything from agriculture to apparel and textiles, Oil And Gas is there. Robotics, tool and die manufacturers, and semiconductors. The list goes on, and we work with these R&D tax credits.

Lisa Ryan: [00:04:12]:

So you mentioned that I thought about what R&D is and isn't fascinating. It just sounds like it's research and development. What might your clients think is R & D but isn't?

Casey Barka: Yes. Many people believe that this is the white lab coat, beakers, and goggles, mixing and doing things of that nature, but it's much more than that. The way that the credit is, we call it an R&D study. We're doing a study for each of our clients. And as we're diving in, it's a project-based analysis. We look at your projects or R&D initiatives, which can be very broad in scope. What we always fall back to is the 4 part test. This is the basis for a lot of our analysis.  

You must start with what's called the permitted purpose. Now this is basically what you are doing. As I mentioned, this could be the product process improvement, formulation, technique, or patent. You're trying to impart newer, improved functionality, performance, quality, reliability, and tangible metrics. You're not quite sure how that's going to go. You have to have some technical uncertainty or a challenge. That can be in a couple of different forms.

It could be you didn't know if you could do it. It could be capability, or it may not. You might not know what the optimal design will be or how you will do this. The methodology that goes into that to overcome those. That's the second prong, by the way, the uncertainty. To overcome that uncertainty, you go through a process of experimentation. Now this, again, is unique to each client that we have. Not everybody does things the same way, but it's looking at a regimen or trial and error.

It can be some formalized product development life cycle that you may have, a stage gate process, or a mechanism that our clients have in place where they evaluate alternative solutions. They have a hypothesis and devise ways to test it to see the best design. They go through some modeling or simulation. They go through prototyping stages where they test and ensure they achieve the requirements and specifications they sought to develop or design. That's the 3rd prong, like, the how you do it. What was that process, and what did it look like?

And the 4th part of this is we're only looking at the technological activities. These are based on the hard sciences. We're not concerned about your marketing, sales, and HR back-office. We're looking at those people actively using biology, chemistry, physics, engineering principles, and things of that nature and applying those concepts in and throughout that 4-part test. We analyze which projects are qualified and which are disqualified and removed from the analysis for each of those projects. Once we have qualified projects, we start getting into the qualified expenses associated with each of those projects.

Lisa Ryan: This may be a similar question, but are there other common misconceptions people have about R&D tax credits in the manufacturing industry?

Casey Barka: You would be surprised. We hear it's good to be skeptical of whether or not you qualify for this because not everybody is qualified or doing qualified activities. Here at Strike, we ensure we do everything by the book. It's very ethical. We're not overinflating your credits because part of what we do is stand behind our work. We have a money-back guarantee on anything we help our clients claim.

Some of those misconceptions, we don't qualify. Our main thought is that we're just doing general production. The question to that is, do you need to improve your products? Do you need to go through and add new features and enhancements, or are you adding automation on the process side? Are you increasing your throughput and efficiency and improving your quality metrics? Those are all process improvement initiatives we see in the manufacturing sector that people often don't think about, but that is a qualified R&D activity.

That process improvement and things of that nature, some people don't think we don't have engineers on staff. We do a lot of on-the-job training. We hire from tech schools. It doesn't matter. Again, it's based on the activities that you're doing. And if you're doing the If you're using the scientific principles in this in the improvements that you're making within your facility, often that would be qualified. And often, clients don't understand the full breadth of expenses we can also claim. For each project, we can look at not only your employee wages but also your taxable W2 box 1. That's what we're looking for. But raw materials and supplies are used during the R&D process.

If you're doing prototyping, if you're doing first articles, if you're doing certifications and things of that nature before production, all of the supplies that went into that first article, or maybe you had to go through four different versions of that prototype before you stamped it off for production. For each of those four, you're still resolving that to uncertainty. Whether it is a design or your methods, the raw materials can add up quickly if you outsource to a third-party contractor. You may not have those fee capabilities in-house. There are often testing facilities that people will send samples to or have those contract employees, the ten people you pay, inside your facility. That contractor costs, as long as they're doing the qualified activities I mentioned before, but we can count those expenses. Then the fourth one will probably only apply to some of our manufacturing clients, but you can include computer rent for our software clients developing in the cloud. They're paying for their development for Amazon Web Services and Microsoft Azure if we can include them.

Lisa Ryan: Okay. Do you have some examples of people you've worked with, like other manufacturers, who have benefited from R&D tax credits?

Casey Barka:: We have had to thin down the list. We've worked with over 400 R & D clients now. I picked a couple of examples I did want to share. Our custom racing engine manufacturer in Houston is one of our clients. They have about 20 employees or so. Almost half of them were involved in designing and building these custom racing engines. And from 27 to 2021, we got them close to $660,000 of tax credits that are cash in your hand. These are refunds from the IRS or a reduction of your tax liability in the current year.

Another robotics client that we had. We've done a couple of these very similar, about ten to 15 employees, about $600,000 of credits. One client I have in Indiana, another robotics. They build custom gantries and things of that nature that are used in manufacturing. They're developing the robotics going into the end user's facilities. And about 40 employees in that company, about 25, are very technical and engineering-focused. We got them $3,700,000,000 over five years. We've worked with them. These credits can be very lucrative and help move that needle to get companies to pay 0 tax if they're doing the right types of activities and they have the expenses to show court.

Lisa Ryan:  What were they doing before? Do a lot of manufacturers not know that these tax credits exist, or are they just doing it poorly, or what was happening before they were suddenly saving all this $600,000 or $3,000,000?

Casey Barka: You hit it right on the head. There are many we'd be able to out there that don't know this is on the books. It's that it's an incentive that is available to them. I've studied for some IRS certifications, things of that nature, and the 1200 pages of study materials for the full tax code. Section 41 was two paragraphs out of that. It's a very niche credit. Not a lot of people know about it. Even the CPAs that we partner with are helping their clients. We're often educating them for the first time. I remember hearing about this, but I don't have the bandwidth to do it. And that's what we hear, and that's why striking exists is that CPAs they're swamped. They're handling most of the general tax return, and they don't have the bandwidth to do these specialty calculations, which are pretty complex and require an outside expert who should be able to do it accurately and sustain the credits we calculate.

Lisa Ryan: All I'm thinking about is not reading a 1200-page document on tax code. But good for you for finding that one paragraph that makes all the difference because that would just not be my strength.

Casey Barka: Yeah. I'm not going to lie. A tax code reading all of that is not the most enjoyable. Still, after you have it in your brain for as many years as I have, it's kind of like the back of your hand that then it just applies to being able to disseminate that information to our clients and educate them on what they should have been claiming all along. We've just recently signed a client that's been around since 88, I believe, 89. A manufacturing client founded them. And literally, they could have been claiming this since they opened their doors. Every year, they're working on new product launches and things they want to add to their catalog or portfolio of products they're selling to the public, and we're going to be able to go back to the prior three years. We can go back and amend your three previous years' tax returns. As long as it's still open for amendment, you can go back and calculate these credits, claim them on an amended return, and get a refund check back from the IRS.

Lisa Ryan:  Okay. So, yeah, that answered my question - for the last 30 years of that, they were screwed, but for the last three years, they could go back and get some of that.

Casey Barka: Correct. That's right.

Lisa Ryan:  You mentioned how much the tax code changes every year. What has? Can you provide us with an overview of what changed for 2022 and some of the challenges that manufacturers face if things like, I think it's section 174? If some of these changes are still being overturned.

Casey Barka: Yeah. This has been a real eye-opener for many of our clients, and it's not necessarily in a good way. Unfortunately, in 2017, the Tax Cuts And Jobs Act was passed. This was a way that lowered the corporate tax rate down back down to 21%. It had some other incentives and things of that nature in there. But they had to figure out how to pay for those tax cuts. What they what the way it was written is they had five years before these changes took effect.

For 2022, let me back up. It might be easier. What is the interplay between section 174 that you mentioned and section 41? If you want to think about an icon bull's eye with concentric circles in it. Your business incurs in a given year if you have all the expenses. That can be everything from your meals and entertainment to your depreciation expense, to all those different things that fall underneath costs, right, then your general ledger. Section 1 74 has to do with research and experimentation. Section 41 is a subset of that. Now section 41 is used to calculate your R&D tax credit for research-increasing research activities. What changed is that before 2022, nobody cared about 1 74. It was always there in order to have an R&D credit; the expense has to be subject to 174. That was the initial qualification. After that, CPAs didn't care. They just put it all in any general business expenses. For 2022, they took away the ability for a taxpayer to deduct ten percent of those expenses in the year.

What has to happen now is that any research and experimentation expenses must be now capitalized and amortized over Five years. And there is a midpoint convention to that, without getting into the weeds; essentially, you had $1,000,000 of research expense to throw out a nice round number. k. For 2022, instead of deducting or writing off that $1,000,000, you can only deduct ten percent or $100,000. The other 900,000 gets added back to taxable income. That means that anybody that's doing R&D or RNE if you will. 2022 has become an eye-opener, painful, higher tax bills for many clients. And it is the tax code. It's the way it's written. There is a considerable push from various lobbying groups that we've partnered with from an education standpoint. So, like, the National Association of Manufacturers, nam.org. I think a lot of you are familiar with that. They have taken a spearhead to this and are actively trying to get people to reach out to their legislation, representatives, and senators.

Two bills are in Congress now - one in the Senate and one in the House that is looking to change this law, mainly because it's detrimental to the people doing the innovation and driving growth in the US. This is a kick in the teeth if you will. And there are companies I've worked explicitly on where the owner had to take out a $1,500,000 personal loan this year to cover his tax bill just because of this rule change. And -- Wow. -- and, again, it's across the board. If you want to extrapolate that to Tesla and Lockheed Martin doing R&D, they're spending a million dollars, and only ten percent of that can be written off in a year. The big companies are feeling the hit as well. They've had to reissue some 10Ks for the publicly traded companies because their profitability outlook went through the floor.

Lisa Ryan: Wow. Oh, and you'd think that with something like this, it would really stimulate, like you said, not only keeping manufacturing here in the United States but also stimulating innovation and growth within manufacturers because they're constantly looking for ways to improve their products. What do you see again regarding how they've used those credits to stimulate innovation and growth up until now?

Casey Barka: If you want to consider it a blank check. It's money that you are owed; you're refunded. It's real cash in hand. Suppose you are a manufacturer and you qualify. In that case, you're doing these types of research projects, your new product releases, process improvements, you're getting, you're doing stuff, and you're getting patents. Patents are a great way to substantiate that you are doing R&D., But you can use this to hire more people, right? Say I threw out a $1,000,000 earlier in the back of the napkin calculation at the federal level; think about ten% returns. for every $1,000,000 that you spend, you'll probably get a $ten0,000, give or take, of actual R&D credit. that's a dollar-for-dollar deduction of your tax liability. It's not a deduction. It's a tax credit that is the bottom line. What is your overall tax liability? Credits are there to reduce that down to 0. Yes. You can hire more people. You can buy equipment. You can plan for that expansion that you want to do to your facility and add new capabilities and things of that nature. And in addition, you can use that as a tax planning tool because manufacturers we deal with frequently like to run close to even. They don't want to pay a lot of tax. They don't want to be at a loss, either. They try getting as close to netting out at 0 as possible. But now, if you know that you have this pool of tax credits, you can work with your CPAs to maybe change the way that you're doing your bonus depreciation, maybe the way that you're doing the way that you're writing off some of your assets, you can use them as a way to raise your taxable income. Still,...

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About your host

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Lisa Ryan

As a Certified Speaking Professional (CSP), an award-winning speaker and author of ten books, Lisa Ryan, CSP, works with her clients to develop employee and client engagement initiatives and strategies that keep their top talent and best clients from becoming someone else’s.
Lisa’s expertise includes: strengthening workplace culture, improving employee engagement, increasing customer retention, and initiating gratitude strategies (“Grategies”) for personal and professional benefit. Lisa’s participants enjoy her high energy, enthusiastic delivery and quick wit and they leave the session with ideas they are committed to acting on immediately to make positive workplace culture changes.
Lisa costars in two films with other experts including Jack Canfield of “Chicken Soup for the Soul.” She is the Past-President of the National Speakers Association, Ohio Chapter and holds an MBA from Cleveland State University.

Relevant Experience

• Keynote, breakout or workshop speaker at more than 100 national and international conferences
• Thirteen years of industrial marketing and sales experience, including seven years in the welding industry – and yes, she does weld
• Host of “Elevate Your Engagement Levels: What You Need to Know” on the Elite Expert Network and the C-Suite Network
• Creator of “The Seven Mistakes Managers Make to Crush Company Culture” video series
• Best-selling author of ten books, including “Manufacturing Engagement: 98 Proven Strategies to Attract and Retain Your Industry’s Top Talent”
• Award-winning speaker