Letting the Government Pay You for Firearms Innovation

Let’s say you are the manufacturer or an inventor of firearms or firearms-related accessories. A friend mentions that you could be getting R&D credits under Section 41 as well as R&E deductions under Section 174. It sounds to you like your friend is speaking in some sort of code. The reality is that your friend is - the Internal Revenue Code. Helping me decipher what all this means is Kevin Culver of Royse Partners. Kevin is an attorney and the VP for Tax Incentives & Associate General Counsel. Located in Columbus, Ohio and Houston, Texas, Royse Partners works with all kinds of businesses including those in the firearms industry to help them get tax credits and tax deductions for their product development.

Section 41 Research and Development tax credits provide businesses with dollar-for-dollar tax savings for developing new products, new processes, or improving existing ones. For example, your company produces smokeless gun powder, and you want to make one that is temperature stable. Many existing powders are not temperature stable and will increase pressures as the heat rises. To get a tax credit for developing or improving this temperature stable smokeless power, you need to meet a four-part test. Furthermore, the activities must be US based whether done in- house or through contracted research. It also has to be for one of six core business components:  product, process, formula, invention, software, or technique.

The temperature stable powder would meet the first test because it is improved. It would meet the second test as you are trying to solve the issue of increased pressures related to higher outside temperature. To meet the third test, you would have had to evaluate different coatings or formulations to achieve temperature stability. Finally, your evaluations would have had to be based upon hard or physical sciences as opposed to the social sciences. If you met these criteria, then you can get credits for salaries, contractor expenses, supply and materials, and cloud hosting expenses. Not only that but these credits can carry forward for up to 20 years.

Section 174 of the Internal Revenue Code also deals with R&D though it calls it research and experimentation. However, these are costs incidental to research. Included in incidental costs would be salaries, supplies and materials, patent costs, contract research expenses, overhead expenses, and software development. As these costs are incidental to research, they only qualify for a tax deduction and not a tax credit.

As of tax year 2022, this deduction for incidental research expenses must be amortized over a period of five years. Unlike Section 41 tax credits, foreign based research expenses are eligible though they must be amortized over a 15-year period. Certain expenses are excluded from consideration under Section 174. These include things like ordinary quality control testing, efficiency surveys, expenses related to marketing such as consumer surveys or advertising, purchase of another company’s patent, and research in connection with literary or historical projects.

As you can tell, deciding what qualifies and how to properly account for it to the IRS’s satisfaction can be difficult. That is where Kevin and Royse Partners come in. Their team of attorneys, CPAs, engineers, and a Certified Fraud Examiner will provide a free initial consultation with the company. Provided the R&D credit is a good fit for your company, they will start an evaluation to determine what credits or deductions you might qualify for and what documentation will be required. If it is found to be viable, they work to quantify the credits and then finally deliver a Final Credit Letter. As Kevin emphasized, Royse Partners only gets paid if they are successful in delivering you a tax credit or deduction. If you would like to contact Kevin Culver, Esq. and Royse Partners, they can be reached at (888) 347-6973, or via their website RoysePartners.com. You can also email Kevin directly at kculver@roysepartners.com.

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About the Author

John Richardson is a certified financial planner (ret.) and blogger who has written about gun rights and Second Amendment issues since 2010 at No Lawyers – Only Guns and Money. His blogging earned him the Second Amendment Foundation’s Ray Carter Blogger of the Year Award in 2017. He is a NRA Certified Basic Pistol Instructor and has held a Curios and Relics FFL for over 20 years. 

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