Manufacturing R&D Tax Credits: Are You Missing Thousands in Cash Savings?
Originally published on December 8, 2025
Most manufacturing executives assume R&D tax credits only apply to companies developing breakthrough products in sterile laboratories. The reality? Your company is likely performing qualifying activities right now. Process improvements, safety redesigns, and efficiency upgrades, without capturing the substantial tax benefits available.
During a recent Moore on Manufacturing podcast, Kris Hutchins, a leader in James Moore & Company’s research and development department and R&D tax credit calculations, shared valuable insights on how manufacturers can identify and document qualifying activities to maximize their manufacturing R&D tax credits. This discussion highlighted the critical importance of understanding what truly qualifies and building proper documentation systems to ensure long-term tax savings.
What Are Manufacturing R&D Tax Credits?
The R&D tax credit represents “the government’s way of trying to incentivize US jobs,” according to Hutchins. This credit has existed for years with a clear purpose: “fostering innovation and creating US jobs.”
Unlike traditional deductions, the R&D credit provides dollar-for-dollar offsets against your tax liability. As Hutchins explains, “It’s really a high benefit way more than deductions are because you’re not having to apply tax rates to them. It’s almost acting like additional payments, reducing the amount of cash you have to come out for.”
The credit can be applied to both income taxes and, in certain circumstances, payroll taxes, making it accessible even for companies without current tax liability.
The Four-Part Test: Does Your Work Qualify?
To qualify for manufacturing R&D tax credits, your activities must pass a four-part test. All four components are required:
1. Business Component with Permitted Purpose
You must be “creating or improving existing products, processes, software, inventions, techniques,” where you’re “adding function, adding quality, adding reliability, adding performance” to something, Hutchins notes.
2. Technical Nature
The work must involve hard sciences: “engineering, chemistry, physics, mathematics, computer sciences.” Hutchins clarifies that “things that wouldn’t qualify would be social sciences, art, humanities, market research.”
For manufacturers, engineering typically serves as the primary qualification area.
3. Elimination of Uncertainty
“At the start of this project there is something that you don’t know how to do,” Hutchins explains. This uncertainty drives the research process forward.
4. Process of Experimentation
You must conduct “a series of things that you were doing, testing alternatives, testing hypotheses, doing different methods to figure out how to get to that permitted purpose.”
Common Manufacturing Activities That Qualify
Process Improvements and Efficiency
Many manufacturers miss qualifying activities because they focus only on new products. Hutchins emphasizes that qualifying work includes “redesigning your process to eliminate waste” and “spending a lot of time and effort in spending a lot of your company’s wages to redesign your floors to be more efficient and to build better products.”
Safety and Compliance Enhancements
Engineering new processes to improve safety qualifies. “Are we changing your packaging, experimenting with different materials and ways that you’re building your packaging” for safety or sustainability reasons? These activities qualify.
Product Modifications
The work doesn’t need to be “brand new to the entire world,” according to Hutchins. “It just has to be something to you that you had to go through a process of experimentation and that you were uncertain how to do something.”
He suggests thinking about it this way: “You start out a project and you say I know what I want my end goal to be but I don’t know how to get there and I’m going to have to try different things to figure out how to get to my end goal.”
What Costs Can You Claim?
Manufacturing R&D tax credits pull from three cost categories:
- Wages – “Typically going to be your biggest, highest volume there,” Hutchins notes
- Contract labor
- Supplies
One important limitation: “The development has to be in the US to qualify for this credit. Any of the stuff that you’re outsourcing will not qualify.”
The Documentation Challenge
Hutchins stresses that “it’s a highly beneficial credit so it brings a little bit more scrutiny from the IRS.” You need proper substantiation including “testing logs, the different design plans that you have, different time tracking.”
The key is building systems now rather than scrambling during an audit. “Really engaging with a professional and engaging with a firm that specializes in a lot of this work can help you find those maybe not so obvious activities that qualify and really help you bolster your documentation.”
Time tracking proves especially critical since wages represent the largest credit component. “Are you doing the time tracking to put it to the specific projects? Because that’s what they’re going to come in and want to see.”
Common Misconceptions About Manufacturing R&D Tax Credits
“We Don’t Make Brand New Products Every Year”
“The biggest misconception is that it needs to be a completely brand new product each and every single year,” Hutchins explains. Improvements to existing products, manufacturing processes, or efficiency measures all qualify.
“We’re Not Paying Tax Right Now”
Companies without current tax liability often skip the credit, but “you really are just leaving money on the table,” warns Hutchins. “These credits do carry forward so if you don’t use them in a particular year you may get the benefit from them in a future year where perhaps you had a sale of the company, you had a really big year.”
“We Need PhD Scientists”
Engineers don’t need advanced degrees. “They don’t necessarily need to be degree engineers,” Hutchins clarifies. “You can be working on doing a lot of that same type of work and you might not necessarily have some of that exact title.”
Economic Risk and Substantial Rights
One tricky area involves work performed for customers. “If you are getting paid regardless of whether this product succeeds or fails, that’s not going to qualify,” Hutchins explains. However, “if you’re being tasked to develop something and you’re only going to get paid if you’re successful in doing it, you have what we call that economic risk.”
Additionally, “if you are retaining substantial rights to the technology or what you’re developing, that can qualify.”
Maximize Your Manufacturing R&D Tax Credits
The beauty of manufacturing R&D tax credits is that you’re likely already doing the qualifying work. “It’s stuff you’re already doing most likely,” the podcast hosts note. You simply need proper tracking and documentation systems.
Hutchins recommends early conversations with specialists: “Amending for the R&D credit has become more difficult in the past couple of years, so having these conversations with a professional on the front end” proves crucial. “Even if you’re not diving in or having huge spend on it that first year but you know that it’s coming, have these conversations now.”
Take Action on Your Tax Savings
If you have engineers, developers, or technical staff on payroll, you almost certainly have qualifying activities. “If you have engineers on staff, chances are they’re not directly involved in day-to-day production. They’re doing other stuff,” and that “other stuff” often qualifies.
“If you qualify for it, which I think a lot of companies out there do, you’re just leaving money on the table by not taking advantage of these credits,” Hutchins concludes. “It’s cash, and cash is king.”
