The majority of textile manufacturing companies are continually improving existing products and developing new manufacturing processes.
From a product standpoint, activities undertaken to develop new product offerings qualify for the R&D credit.
Similarly, activities revolving around changes to existing products that enhance or improve performance, reliability or quality may also qualify for the R&D credit.
Apparel manufacturing companies are also eligible for the research and development tax credit for any activities relating to creating new and or improving existing manufacturing processes. In order to remain competitive in the market, companies are constantly researching and developing ways to manufacture textiles faster, with better quality and for less money. This can include automating processes, eliminating waste, recycling waste material, and many others.
Some Textile and Apparel Manufacturing Activities that qualify for R&D
- Developing new or improved apparel manufacturing processes
- Improving the existing production processes in textile manufacturing
- The testing and producing of advanced clothing moisture management
- Inventing and getting patents on smart clothing that removes odors and prevents stains
- Researching material that lasts longer
- Generating prototypes and fit samples of new apparel products for testing and validation
- Developing new uses for nanotechnology to help meet the demand for ‘comfort materials’
- Testing the types of more efficient dying processes which can result in quicker manufacturing
- Developing health care fabrics – fabrics which can release vitamins or other drugs to the body
- Creating and improving energy storing textiles, that monitor temperature or other vitals
- Testing the soil in which the natural cotton, bamboo, and hemp crops are grown
- Researching the amount of waste and better ways to reduce it
- Research on innovation in fiber, yarn, finishes and other materials available
- Testing textiles in extreme weather conditions
- Testing and developing better weaving methods for comfort
- Testing how long certain textiles last compared to others
A large range of “smart textiles and apparel” are being developed worldwide, including those that interact with the surroundings, react to external stimuli, store and release energy, and are conductive and connect via electronics.
In the healthcare field, current research is being conducted with “smart” textiles and apparel such as shirts with smart sensors that can measure, transmit and record key health indicators of the wearer including heart rate, respiration, skin temperature and posture.
Textile and apparel manufacturing companies attempting to develop new or improved products like “smart textiles”, processes, or software are eligible for federal and state R&D tax credits. These credits can equal up to 15 percent or more of qualified spending costs, i.e., taxable wages, supply expenses, and a percentage of contract research expenses related to the research conducted.
R&D tax credits are dollar-for-dollar reductions in tax liability. These credits allow manufacturers of all sizes to reduce their effective tax rate as well as increase their cash flow, earnings per share, and return on investment.
Eligible activities include attempting to develop or improve products, manufacturing equipment, prototypes, new materials, environmental impact, automation opportunities, lean manufacturing, and software.
What Manufacturing Companies Need to Do to Take Advantage of This Opportunity
Documentation is key in any R&D credit claim. This includes documentation regarding the activities taken place, those involved and to what extent, as well as any costs incurred during the research process, such as supplies or contractors. Far too many taxpayers rely on non-specialist preparers to calculate the R&D credit, often resulting in an audit risk for overstating the credit or leaving opportunity on the table by understating it, as well as not preparing the documentation required to substantiate the credit.
Given the significant funds available in the form of R&D tax credits, it is worth exploring if your textile or apparel manufacturing business qualifies. Business Resource Services understands your business and the regulations to confirm if your process or product improvements qualify.