Walk through almost any manufacturing facility and you will see teams solving problems in real time: a machine is not producing parts within tolerance, a material behaves differently under heat, a production line needs to move faster without sacrificing quality. These moments rarely feel like “research and development,” but in many cases, they are exactly that.
The federal R&D tax credit was built to reward this kind of work. Despite what we may associate with research, the credit is not limited to laboratories or breakthrough inventions. It applies to the practical, day to day efforts manufacturers make to improve products, refine processes, and solve technical challenges on the shop floor. If you’ve been wondering if your company qualifies for the R&D tax credit, especially at a time where big changes are happening, you’re not alone. Many are in search of guidance on how the recently enacted Section 174A can benefit businesses claiming the research credit during tax season.
This guide uses clear terms to explain what you need to know about the R&D tax credits for manufacturing. It is intended as a definitive resource for plant managers, CFOs, and owners of manufacturing firms to understand how their shop-floor improvements translate into significant tax savings.
We’ll address the following questions with clear, actionable answers:
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- What are R&D tax credits for manufacturing?
- What determines R&D tax credit qualification?
- What are common examples of credits for manufacturers?
- How do I identify qualified research expenses in a plant?
- How do I claim these credits in 2026?
What Are R&D Tax Credits for Manufacturing?
R&D tax credits for manufacturing are a dollar-for-dollar reduction in tax liability for companies that develop new products or improve existing manufacturing processes through technical work. Put simply, if your team spends time and money solving engineering problems, some of those costs may generate a tax credit. For manufacturers, this often includes:
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- Improving how a product is made
- Increasing production speed or efficiency
- Achieving tighter tolerances or higher quality
- Working with new materials or components
- Reducing waste or energy usage
A “manufacturing process improvement” usually means making a meaningful change to how the process operates so that it performs better, costs less, or can produce in a more reliable way. Understandably, many companies aren’t aware of this nuance and assume the credit only applies to brand new inventions. That is thankfully not the case! The credit also applies to incremental improvements, as long as the work involves technical uncertainty and experimentation.
According to the IRS, qualifying research activities must aim to develop or improve a product or process and involve a process of experimentation grounded in science or engineering. So this means, just to name a few examples, machinists adjusting tooling, engineers testing materials, and production teams refining workflows may all be contributing to qualifying R&D.
R&D Tax Credit Qualification for Manufacturing: The Four-Part Test
To determine whether your company’s activities qualify for the tax credit, the IRS uses a framework known as the Four-Part Test. If you are hearing about this test for the first time, we’ll offer a brief overview of the test here alongside some examples of activities that may qualify. You can delve much deeper into all things related to Qualified Research Expenses (QREs) in this comprehensive guide to the R&D tax credit.
Every qualifying activity must meet all four criteria:
Permitted Purpose
The work must aim to create a new or improved manufacturing process. The improvement does not need to be groundbreaking. It just needs to meaningfully enhance performance, quality, or reliability. In a factory setting, this could include:
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- Designing a more durable component
- Increasing the speed of an assembly line
- Improving product consistency
Technical Uncertainty
At the start of the project, there must be uncertainty about how to achieve the desired result. Ask yourself the following questions, “Can we develop it?” and “How can we develop it?” If the answer is not obvious and requires testing, the activity may qualify. Some examples of questions you might ask are:
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- Can this part be produced within a tighter tolerance?
- Will a new material withstand heat or stress?
- Can production speed increase without defects?
Process of Experimentation
The team must evaluate different approaches to solve the problem. A systematic trial and error process to evaluate alternatives is a key part of this requirement. Activities that fulfill that can include:
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- Testing multiple toolpaths in CNC machining
- Trying different mold designs in injection molding
- Adjusting temperatures, pressures, or materials in production
Technological in Nature
The work must rely on principles of engineering, physical or biological sciences, or computer science. The good news is most manufacturing environments naturally meet this requirement because production relies on applied science and engineering.
Common Examples: R&D Across Manufacturing Industries
Contrary to what we would assume, research and development in manufacturing is not actually confined to a specific department. It happens anywhere teams are working through technical challenges, so the possibilities are quite vast. Below are some examples across a range of industries that can give you an idea of which of your company’s activities can qualify:
Consumer and Lifestyle Goods
Those in consumer goods manufacturing of everyday products often perform R&D while improving processes. . A non-exhaustive list of examples can include:
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- Developing more durable materials for sporting goods
- Refining product assembly methods to reduce defects
- Enhancing production speed
Even small process improvements often require testing and iteration, so don’t count them out!
Food, Health, and Beauty Products
Consumer packaged goods companies frequently conduct R&D while adjusting production processes. This is especially true for “clean label” initiatives, which generally requires a lot of research into new formulations and, subsequently, updates in the manufacturing process. Examples of these activities can include:
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- Extending shelf life without preservatives
- Improving consistency in food textures
These activities often involve repeated testing to achieve the desired result, which makes them very strong contenders for the tax credit.
Heavy Industrial, Automotive, and Aerospace
Large scale manufacturers often engage in complex engineering work. Qualifying examples of this kind of work could include:
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- Improving energy efficiency in the production process
- Developing new fabrication techniques
As you can see, these projects typically involve extensive experimentation and validation.
Materials, Chemicals, and Textiles
R&D in materials manufacturing focuses on performance and sustainability. Material behavior often requires careful experimentation, which can make for a very straightforward tax credit claim. Examples of what qualifying activities can look like include:
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- Developing stronger or lighter materials
- Enhancing durability in textiles
- Reducing production waste
Medical Devices and Life Sciences Manufacturing
These environments involve strict performance and safety standards. Naturally, each step towards achieving these standards typically involves controlled testing and documentation. Examples of qualifying activities in these fields include:
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- Prototyping and testing
- Refining sterilization processes
- Improving manufacturing precision
- Validating production methods
Contract Manufacturers and Job Shops
Contract manufacturers can qualify for the credit depending on who bears the financial risk and retains substantial rights in the development. The work may qualify if a manufacturer:
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- Takes on the financial risk of failure
- Is not fully reimbursed regardless of outcome
This is often referred to as the “rights and risks” standard in tax guidance.
Identifying Qualified Research Expenses in a Plant
So much happens in a plant every day that it can be difficult to parse out what actually counts as a qualified expense. To start, you can orient yourself around the four categories of QREs:
1. Employee Wages
Wages are likely going to be the largest component of your expenses. Think of this section as what you would find in Box 1 on your W2. This cost for the research credit includes employees who:
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- Perform technical work directly
- Supervise research activities
- Support experimentation efforts
Examples include engineers, machinists, technicians, and production supervisors involved in testing. It’s important to note that job titles and descriptions alone do not determine if the wages qualify. The IRS makes the final call on which jobs fulfill these requirements.
2. Supplies and Materials
Materials used during experimentation can qualify if they are tangible and non-depreciable. These can include:
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- Raw materials used in prototypes
- Components consumed during trial runs
Keep in mind that materials used in production runs after the process has been established do not qualify.
3. Contract Research
65% of your US-based contract research expenses can qualify for the credit. Payments to these third party contractors may qualify if:
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- The work involves qualifying research activities
- The taxpayer assumes financial risk and substantial rights in the development
4. Software and Technical Tools
Manufacturers increasingly rely on software for design and testing. The IRS includes certain computer-related costs as part of your qualified research expenses, but only under specific conditions. In some cases, you can claim costs involving research activities if they are related to:
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- CAD or CAM systems
- Simulation software
- Cloud computing used for modeling
How to Claim R&D Tax Credits for Manufacturers
Section 174A restores immediate expensing for domestic manufacturing R&D, which stands in stark contrast to the 5-year amortization rules in effect for the 2022-2024 tax years. Because of this, there is a massive cash-flow benefit for the current tax year.
Claiming the credit involves identifying qualifying activities, calculating eligible expenses, and filing the appropriate forms with the IRS. While this can sound a bit overwhelming, let’s break those steps down further to make sense of it all:
Step 1: Identify Qualifying Projects
Your qualifying projects form the foundation of your claim, so it’s crucial to understand what those will actually be. Start by reviewing projects where your team:
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- Faced technical challenges
- Tested multiple approaches
- Made improvements to processes
Step 2: Calculate Qualified Research Expenses
Break down your QREs according to the categories detailed in the previous section:
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- Employee wages for technical staff
- Supplies used during experimentation
- Contract research expenses
- Cloud computing expenses
Step 3: Document the Work
When organizing your documentation to apply for the tax credit, you will want your materials to show:
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- What problem was being solved
- What uncertainty existed
- What experiments were conducted
- What the results were
This does not require formal lab reports as existing business records are often sufficient. Any contemporaneous records, project logs, and supply costs will help you make your claim.
Step 4: File the Credit
The credit is calculated using Form 6765 and filing it with your federal tax return. For an introduction and instructions to this very important form, you can read through this step-by-step guide to Form 6765.
Turning Shop Floor Work into Strategic Value
When manufacturers take the time to understand how their technical work fits into the R&D framework, filing the tax return becomes more than a compliance exercise. It becomes a way to recover part of the investment already being made in engineering and process improvement. That recovered capital can support equipment upgrades, additional hiring, further product development, and process innovation!
For companies operating in competitive markets, this can provide a meaningful advantage.
“We will be pouring our $62K R&D tax credit right back into the building of the company. It speaks to the heart of why tax credits like these exist. This credit…allows a company like AssetWatch (formerly Nikola Labs) to capture money that we will reinvest into growth, meaning more jobs and economic development.”
Why Many Manufacturers Miss the Credit
In reality, many manufacturers already perform qualifying work. The challenge is identifying and documenting it properly. Unfortunately, even companies with significant engineering activity can overlook the R&D tax credit due to not having enough information available.
A common reason is thinking that only new inventions qualify or that the R&D activities being performed aren’t “real research.” Another, of course, is lacking structured documentation and being too overwhelmed by complexity in the filing process. Now being equipped with the essentials, the next step is to figure out if you want to navigate the filing process independently or with an experienced tax professional. While both are good options, a professional can build a low-audit risk tax study that bolsters your research credit claim.
