Manufacturing R&D Tax Credit: Are You Leaving Money on the Table?

Most manufacturers don’t think of their daily operations as research and development. That misunderstanding might be costing them thousands of dollars in unclaimed tax savings. If your team is improving production processes, exploring new materials or solving technical challenges, you may already qualify for the manufacturing R&D tax credit and not even know it.

This credit is not just for scientists or inventors. It benefits engineers, supervisors, technicians and others who apply technical knowledge to improve products or processes. If you are solving problems to make your operation more efficient or productive, there’s a good chance you meet the IRS definition of research. Missing this credit could mean passing up a powerful opportunity to reinvest in your company.

What is the R&D Tax Credit and Why It Matters to Manufacturers

The Research and Development (R&D) Tax Credit, formally known as the Credit for Increasing Research Activities under IRC Section 41, is a permanent federal incentive designed to encourage U.S. businesses to pursue innovation. Originally introduced in 1981 and made permanent by the Protecting Americans from Tax Hikes (PATH) Act in 2015, the credit rewards companies that take risks to improve how they work.

Manufacturers are a prime fit for the credit because of the nature of their work. Whether your company is streamlining a production line, experimenting with automation, modifying tools or equipment or testing prototypes to meet client demands, those activities may qualify. Yet many manufacturing leaders overlook the credit because they associate “research” with white lab coats or software code.

To qualify, activities must:

• Be technological in nature
• Involve a process of experimentation
• Seek to improve a product, process, formula or software
• Address uncertainty about how to achieve a specific result

That definition includes many common efforts on the factory floor. Even refining a piece of machinery to reduce waste or adjusting production workflows to improve output could count as qualified research.

Another benefit is that the credit can be claimed retroactively for open tax years, allowing companies to amend past returns and recover funds. A company with $2 million in qualifying wages could generate more than $160,000 in federal credits annually, depending on how expenses align with the IRS criteria.

If your company is actively solving production problems, you’re likely already doing the kind of work this credit was designed to support.

Qualifying Activities: It’s More Than You Think

One of the biggest misconceptions about the manufacturing R&D tax credit is that it only applies to companies doing “cutting-edge” work. The reality is much more accessible. Many manufacturers qualify without ever filing a patent or creating new products. If your team is improving how things are made, there is a strong chance you are eligible.

Here are common examples of qualifying activities in the manufacturing space:

• Designing or testing product prototypes
• Developing custom tools, dies or molds
• Enhancing production line efficiency
• Experimenting with automation or robotics
• Improving product performance or durability
• Reducing waste through process refinements
• Integrating new materials or sustainable components

These activities typically involve a process of experimentation and technical uncertainty, which are key qualifying criteria under IRS guidelines. You do not have to succeed for the work to count. The credit is based on the effort to resolve uncertainty, not the outcome.

Some manufacturers assume they’re ineligible because they don’t employ engineers or because their work feels routine. But as long as technical staff are applying scientific or engineering principles to solve problems and you’re keeping appropriate documentation, you may be eligible.

To understand whether your specific work qualifies, it helps to speak with a tax professional who understands both IRS criteria and how to apply them to real-world manufacturing environments. Our team at James Moore works directly with manufacturers to uncover eligible projects, track the right documentation, and maximize credit potential.

We also encourage you to visit our R&D tax consulting services page to explore how we guide clients through R&D tax credit qualification and planning. By looking beyond the obvious and into the details of your operations, we help ensure no eligible activity is missed.

How the Credit Works: Calculating and Claiming It

Once you identify qualifying R&D activity, the next step is determining how much you can claim. The credit is based on eligible expenses such as wages, supplies and certain contractor costs. In manufacturing, most of the benefit comes from qualified employee wages.

There are two main methods for calculating the credit:

1. Regular Credit Method (RCM)
   This method compares your current year research spending to a fixed base amount that considers historical R&D spending and gross receipts. It provides a 20% credit on the increase above that base.
2. Alternative Simplified Credit (ASC)
   This is the most commonly used method for manufacturers because it does not require as much historical data. It offers a 14% credit on research spending that exceeds 50% of the average research expenses from the prior three years.

Eligible expenses include:

• Wages paid to employees involved in qualified research, including managers, engineers and technical staff
• Supplies used during R&D activities such as materials for prototypes or testing
• Contract research expenses for outsourced development or testing efforts

Keep in mind that expenses must relate directly to qualifying activities. General administrative costs or market research do not apply.

The credit is claimed on IRS Form 6765 and can be applied against federal income tax liability. In some cases, qualified small businesses can also use the credit to offset payroll taxes. This is especially helpful for startups and companies not yet generating taxable income.

To learn more about the official rules, definitions and required forms, visit the IRS Form 6765 instructions page. It provides a detailed explanation of how to complete and file the credit properly.

For manufacturers, the opportunity to reinvest tax savings into equipment, talent or process improvements can create a lasting impact. Working with experienced advisors ensures that calculations are accurate, substantiated, and aligned with current guidance.

Examples: How Manufacturers Can Benefit

Many manufacturers qualify for the R&D tax credit without realizing it. For example, imagine a mid-sized custom fabrication company spends over $1.5 million in wages tied to design engineers, production supervisors and tooling specialists. These employees work on modifying product designs to improve client performance specifications, streamlining a bottleneck in their production line, and testing new material tolerances. With accurate documentation, the company could secure more than $120,000 in federal tax credits for that year alone.

Let’s also imagine a regional plastics manufacturer invested in automating a segment of its injection molding process. The project takes months of trial and error and is not fully successful on the first attempt. However, the time and wages spent still qualify under IRS definitions. The team had applied scientific principles to address technical uncertainty, which is the foundation of a valid claim.

This is where expert guidance matters. Manufacturing teams are often too close to the work to identify qualifying research. They may also lack the bandwidth to document efforts in the way the IRS requires. Our team reviews project documentation, payroll records and technical activities to build a strong, defensible claim. We also collaborate with our industry teams to help manufacturers reinvest those credits into strategic improvements.

If you’re curious whether your operation may qualify, visit our manufacturing industry services page to explore how James Moore supports manufacturers through every stage of financial growth.

How to Get Started: What Documentation You’ll Need

Securing the R&D tax credit begins with identifying qualified activities. But proper documentation is what ensures you can defend your claim in the event of an audit. Fortunately, many manufacturers already track the right data. The key is organizing it in a way that aligns with IRS expectations.

Essential documentation includes:

• Payroll records showing which employees participated in qualified activities and how much time was spent
• Project notes, engineering logs or internal communications that describe the technical problem and how the team attempted to solve it
• Invoices or receipts for supplies used in prototypes or testing
• Results from experiments (such as test runs, performance data or client feedback)

The IRS does not require a specific format, but they do expect a clear link between the activity and the qualified expenses claimed. Vague descriptions or inconsistent time tracking can increase the risk of a denied credit.

A common mistake is assuming a failed project does not qualify. The IRS does not penalize failure. In fact, uncertainty and trial are necessary components of a valid claim. As long as the activity seeks a technical improvement and involves structured problem-solving, it may count.

For more detailed guidance on documentation standards and audit expectations, we recommend reviewing the IRS Audit Techniques Guide for the Credit for Increasing Research Activities. It outlines what examiners look for and how companies can prepare.

James Moore’s tax professionals help clients implement systems that support both compliance and future credit claims. We work with your operations team to gather the right evidence and ensure every qualifying activity is properly supported.

Get the Most from Your Manufacturing R&D Tax Credit

The manufacturing R&D tax credit is one of the most overlooked sources of value for mid-sized companies. If your team is improving products or refining operations, you may already be eligible. And if you have never claimed the credit before, you could still capture prior-year benefits with proper documentation.

To learn how the R&D tax credit could benefit your operation, contact a James Moore professional. Our team is ready to assess your eligibility, walk you through the process, and help you keep more of what you earn.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject, please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information within these pages or any information accessed through this site.