The manufacturing market covers a range of physical goods, which includes the creation of finished products from raw materials or semi-finished products, as well as the assembly, installation and repair of industrial machinery and equipment, and encompasses several other sectors.

The activities involved in the manufacturing industry are crucial to the economy and have a significant impact on employment, technological innovation, and international trade. Manufacturers in the United States account for 10.70% of the country’s total production, employing 8.41% of the workforce.

Output in the Manufacturing market is projected to amount to US$4.5tn in 2024, according to Statista. Additionally, the number of employees in the Manufacturing market is projected to amount to 10.28m in 2024.

To support innovation in this sector, the U.S. government offers R&D tax credits to encourage manufacturers to invest in research and development activities. R&D tax credits allow manufacturing companies to claim a portion of their qualified research expenses on their tax returns. This incentive provides manufacturers with funds that can be reinvested into further R&D projects or business growth initiatives.

If you want to learn more about how R&D tax credits work, what benefits they can bring to your company and whether you are eligible to claim them, then continue reading this post.

Table of contents:

What are R&D tax credits
How much you claim R&D tax credits for the manufacturing sector
How to be eligible in the manufacturing sector for R&D tax credits
Qualifying activities for the manufacturing sector

What are R&D Tax Credits

To be on the same page, let’s start with defining what are R&D tax credits. The Research and Development (R&D) Tax Credit is a federal incentive for businesses to invest in R&D activities in the US, providing companies with dollar-for-dollar savings for carrying out innovation-related activities.

This credit is available for different sectors, as long as it meets the criteria by which the incentive classifies “qualified research”, that is: research or experimental expense within the scope of IRC §174, research activities that constitute elements of a process of experimentation related to new or improved functions, among others.

How Much you Claim R&D Tax Credits for the Manufacturing Sector

Let’s get to the most interesting part, looking at the numbers to understand if it is really worth spending time on this.

The key factor is the amount spent on qualified research expenses (QREs). This includes:

Wages for employees working on qualified research activities
Supplies and materials used in the research process
Rent or lease costs for computers and research equipment
Contractor fees for outside research services

The QREs are calculated based on the wages, supplies, and certain other costs related specifically to the company’s qualified research activities. The logic is quite simple — the more money you spend on innovation, the more you can claim.

Federal Tax Credit Rate

For the federal R&D tax credit, companies can claim up to 20% of their current year’s QREs above a base amount. For companies without a base amount, they can claim the entire 20%.

State Credits

In addition, over 35 states offer their own R&D tax credits on top of the federal credit. The state credit percentages and calculations vary.

Example of calculating R&D tax credit

As an example, if a manufacturer spent $1 million on innovation for R&D in a year, they could potentially claim:

Federal credit of $200,000 (20% of $1 million)
Plus a state credit, e.g. 10% in California = $100,000

For a total R&D tax credit of $300,000 for that year’s qualified expenses. Which is pretty not bad, right?

We hope that these conditions have made you think about trying to get this financial help. If so, let’s take a look at what you need to do to claim it.

How to Be Eligible in the Manufacturing Sector for R&D Tax Credits

If you want your manufacturing company to be eligible for the R&D tax credit, then you must meet certain criteria set by the IRS for their research activities to qualify. In general, the work must pass a four-part test, that is the same for any industry:

New or improved product/process. The research must be aimed at developing a new or improved product, process, technique, invention, software, or formula. Simply making cosmetic changes does not count.
Technological uncertainties. At the beginning, there had to be uncertainties about how to develop or design the new/improved product or process. The company could not just follow existing instructions.
Process of experimentation. The research must involve a process of experimentation to evaluate different alternatives and eliminate technological uncertainties. This includes doing modeling, simulation, and systematic trial and error.
Technological in nature. The research must fundamentally rely on hard sciences like engineering, physics, chemistry, biology or computer science.

Besides that you will need to provide a good pack of documents for the successful claim. Here is the list of the typical document types that you will need:

Payroll information for employees and managers involved in R&D.
Reports showing which costs and supplies were for R&D.
Copies of contracts and paid invoices to third-party contractors.
Documents showing the research process and progress: design changes, test results, blueprints, drawings, emails, presentations, meeting minutes, etc.

Now, let’s get into details of what activities in the manufacturing sector qualify for claiming R&D tax credits.

Qualifying Activities for the Manufacturing Sector

R&D is a fundamental piece of economic growth. In the manufacturing industry, it represents a large part of the manufacturing process, including activities used to discover, develop, and implement new processes, products, and technologies, involving scientific and technological research, mainly aimed at market advantage.

Qualifying activities include patent development and many activities that improve or modify an existing product or process, as well as:

Development of lightweight materials for vehicle components to improve fuel efficiency and performance;
Research and testing of advanced safety technologies for autonomous vehicles;
R&D for the development of new drug delivery systems and manufacturing processes to improve drug efficacy;
Research on innovative packaging materials and technologies to ensure the stability and safety of products;
Investigating the application AI for predictive modeling of chemical reactions and material properties;
Innovation in sustainable and eco-friendly manufacturing practices for electronic products to reduce environmental impact;
Development of novel food processing technologies to improve food and safety and extend shelf life.

How can we help you?

We specialize in helping companies finance innovation and secure funding for their Research and Development (R&D) activities through the comprehensive management of R&D Tax Credits. With more than 1,800 qualified employees, counting on specialists from different fields, committed to supporting companies of all sizes and in all sectors of activities. With our expertise, FI Group specialists can support your company in identifying qualified activities.

R&D Tax Credits in the Manufacturing Sector: What are they and how to claim

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