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Case Study: Apparel Manufacturing

Industry: Luxury Clothing & Fashion Accessories

Number of Employees: 500+

Commonly Qualifying Tasks:

  • Design and develop new materials to increase the performance/functionality of the products
  • Develop new techniques to treat/process the leathers, woven, knit or non-woven textiles
  • Design new garment and apparel products to improve functionality, performance, etc.
  • Create prototype and fit samples of new designs and products
  • Perform various testing on prototypes or samples
  • Develop new or improved manufacturing/production process

An apparel manufacturing company conducted an analysis of their 2013 tax year R&D activities. This 500+ employee company had individuals ranging from low-skill laborers to technical designers and engineers. To evaluate their activities, the company looked at their 7 separate departments to start their analysis. In each of the departments there were varying levels of qualifying activities with the exception of the administration team. The following were activities that were qualified across the multiple business units:

  • Developing functional requirements of a product or product enhancement
  • Design and development of new products or processes
  • Design for serviceability, manufacturability and usability
  • Manufacturing process development and improvement

Of their 500+ employees, the company was able to identify that 15% of the workforce performed qualifying activity at varying degrees. In addition to the qualifying wage expenses, the company also evaluated the impact that creating samples had on their budget for raw materials and supplies. It was determined that roughly $1M dollars was expended in creating prototype products in addition to executing first run trials on their factory floor, both of which were qualifying activities.

The last area that was explored in terms of qualifying expenses were contractor costs. These were activities performed by other companies or temporary employees that would qualify for the credit. These expenses went to line items such as industrial design and design for manufacturing. After examining the activities that the contractors were performing, the team was able to qualify several contractors who performed qualifying activities.

Based on this finding, they generated over $5M in qualifying expenses, which yielded a credit of $300K on their timely filed state and federal return.

Alex Pak

Alex Pak is a Director at R&D Incentives Group who joined the team in 2015. His primary responsibilities include leading R&D tax credit projects including reviewing R&D activities, conducting interviews and creating documentation for defense of credits under review. His former experience includes five years of project execution and management for two tax consulting firms through which he was involved in the computation and defense of credits for a broad spectrum of companies in a wide variety of industries including engineering, manufacturing, department of defense contractors and software development firms among others.

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