TSK of America Inc. (a manufacturer of automotive parts) included tooling costs for metal stamping and plastic injection molding in the calculation of its 2013 Research Tax Credit. The tools were purchased from a third party with the intent of being used in production processes.
TSK’s customers usually require TSK to sell any unique tools to them. However, in this case TSK kept the tools due to an extensive trial and error process involved in refining the effectiveness and efficiency of the tools. Despite being purchased from a third party, the tools did not immediately perform at optimal effectiveness and efficiency and had to be altered.
In 2013, TSK included $9.3 million in supplies and materials as part of its qualified research expenses. The IRS initially only allowed approximately $1.2 million of expenses, which would have reduced the Research Credit by $500,000. The IRS’s ultimate concession in this case strengthens the arguments of manufacturers with similar fact patterns, but does not provide any precedential value as it never went to court.