Is your business, like many others, struggling with the high cost of doing business in the United States? Many companies are constantly looking for ways to reduce costs, improve quality, speedy deliveries, and enhance safety. Manufacturing companies have found ways to meet these goals by implementing “lean manufacturing.”

Lean manufacturing, or lean production, is a systematic method for minimizing waste within a manufacturing system, without sacrificing productivity. Lean also takes into account waste created through overburden and unevenness in workloads. By focusing on improving the “flow,” or smoothness of work, lean can provide a set of tools that assists in the identification and steady elimination of waste. Lean improves quality while reducing production time and cost.

Lean defines waste as anything not providing value to the customer, and can be categorized as follows:

Defects
Overproduction
Waiting
Non-value added activities
Travel
Inventory
Motion
Employees not fully utilized

Some recent examples of the results achieved by manufacturers who have implemented lean include:

  • A promotional product manufacturer who saved $3 million in labor costs, reduced scrap by $2 million, and cut $1 million in expedite fees.
  • A manufacturer of labels for medical clinical trials, who saw a 47% reduction in labor, and improvement in printing operations.
  • An automotive products manufacturer, who has reduced product returns fourfold, and cut their lead times by 50%.

Tax Credit for Lean Manufacturing

If you are employing lean manufacturing, or other productivity or process improvements, you may also be able to apply the cost of your improvements towards refundable tax credits. Many manufacturing companies are seeing significant tax savings by applying for the Research and Experimentation Tax Credit (“credit”).

Originally enacted in 1981, after several extensions, the credit was finally made permanent in 2015. The credit is intended to incentivize businesses to increase their spending within the United States on research and experimental (”R&E”) activities. What few realize is that the R&E credit doesn’t have to be anything groundbreaking.

The credit is not limited to any particular industry, but the manufacturing sector is the number one industry claiming it. Another interesting fact is that this credit is largely claimed by small to mid-size businesses, with more than 70% of claimants having annual revenues of less than $50 million.

Expenses that may be eligible for the credit include the wages of employees who spend all or a portion of their time on research and development; supplies used in the creation of prototypes and testing materials; and a percentage of costs paid to outside contractors who are working on behalf of the entity on these activities.

How do you know if your business activities are eligible for the Research and Experimentation Tax Credit? There is a four-part test:

  1. Qualified purpose: Did you create something new or make improvements? This could be related to a product, technique, business process, or software. Remember, this does not have to be new to the world, just to your business.
  2. Elimination of uncertainty: Was the end result initially uncertain and involved testing and adjustments along the way? In other words, were these more than aesthetic changes?
  3. Process of experimentation: Did you use a trial and error method to achieve your goal? Even if you were ultimately unsuccessful, those costs may still qualify.
  4. Technological in nature: Does the experimentation rely on the hard sciences (engineering, chemistry, physics, biology, or computer science)?

Examples of activities related to lean manufacturing that may meet the test include:

  • Streamlining your manufacturing process
  • Developing new software for general and administrative functions
  • Improving business processes
  • Adding equipment that makes the production process more efficient
  • Developing new, improved, or more reliable products, processes, or formulas
  • Creating prototypes
  • Warehouse automation

If your company could benefit from implementing lean or might qualify for a refundable Research and Experimentation Tax Credit, reach out to your business advisors to discuss how they can help you improve your business and save you money.

This article was written in collaboration with Summit Safety & Efficiency Solutions, a premier safety, quality, and industrial engineering firm that provides consulting and training services including implementing lean manufacturing. Summit also helps clients leverage federal, state, and local training grants and tax credits yielding tens of thousands of dollars.