Research and Development Credits Are Available for Apparel Companies
8/18/2010
Many apparel companies may not be aware that Federal research and development (R&D) tax credits, and similar credits from certain states, are available to a wide range of apparel companies. These credits present a value proposition for apparel companies with business expenses incurred within the United States in the design and development of products such as garments, shoes, and accessories.
How it works
For apparel companies, R&D credits apply primarily to business expenses related to design. Since current statutes require only that a product or process is new or an improvement for the individual taxpayer, rather than for the industry as a whole, the vast majority of apparel companies have design-related expenses that can qualify.
Accounting professionals closely examine the company’s businesses, identifying qualifying expenses to ensure maximum benefit. These often include designers’ salaries, equipment, materials, prototypes, and the cost associated with protecting your designs. For most companies, salaries alone will account for a significant portion of the qualifying expenses. Examples of qualifying design activities are below.
What may qualify for R&D credits?
General items include:
- Formulation of leather and dye treatments
- Improvement of weaving techniques
- Colorfastness testing of garments
- Tensile strength testing of garments
- Garment construction and fit evaluation
- Improvements to the designs of an existing line of handbags for increased comfort
- Development of color permanence processes
- Testing of dimensional stability
Other, more targeted improvements that may qualify for the credits include:
- Design of a high-performance fabric that wicked perspiration away from the wearer’s body
- Development of a new line of children’s apparel and accessories (which entailed extensive lead testing)
- Development of patent pending comfort cushion for a new line of shoes
- Improvement of shoe manufacturing processes for an existing line of shoes
- Design of perspiration absorbent material to be incorporated into the shoe products
Case Study
For one large apparel company specializing in product planning, apparel design, and screen printing for the retail clothing industry, taking advantage of the R&D tax credit resulted in over $800,000 of tax savings.
Working with J.H. Cohn to review its R&D credit opportunities, this company was able to claim R&D tax credits for design projects including the development of a high-performance “technical” fabric. The tax refunds that resulted from the amended returns allowed for the purchase of new process equipment as well as an increase in hiring in the subsequent year. This also laid the groundwork for thousands of dollars in additional tax savings in subsequent years.
Time is of the essence
While the filing of amended returns can result in substantial R&D credits, there are certain tax elections related to the R &D credit that are only available during the initial filing. Moreover, amended returns can only be filed for years open under the statute of limitations (generally the previous three years). The deadline for both the initial filing of calendar year 2009 returns and the filing of amended 2006 returns is September 15, 2010 (if for both years the tax returns were fully extended).
Have a discussion with your J.H. Cohn accounting professionals about taking advantage of this value proposition and let them evaluate your company’s position to determine whether R&D credits can lead to substantial savings for your business.
For more information, contact Stan Joseph, CPA, partner and Apparel Industry Practice director, at sjoseph@jhcohn.comor 877-704-3500.
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