How to Claim R&D Tax Credits for Manufacturing in 2024

R&D Tax Credits for Manufacturing Companies provide solid incentives for innovation by allowing manufacturing companies to recoup a portion of their costs on new processes, products, and technologies. In 2024, R&D tax incentives continue to be a worthwhile incentive to pursue for most companies.

In this guide, we'll walk through the steps to claim R&D tax credits for manufacturing, review eligibility requirements, and go over what does and doesn’t qualify for the credit.

What is the R&D Tax Credit?

The research and development tax credit encourages businesses to innovate and think ahead. It credits an average of 6.5-10% of QREs (Qualified Research Expenditures) including wages, supply costs, and contracted research expenses.

The R&D tax credit applies mainly to small and medium-sized businesses. It provides tax incentives for:

• Developing new products or services
• Improvements in old products or services
• The creation or testing of new prototypes 

How Does the Research & Development Tax Credit Work?

The R&D tax credit provides tax breaks to companies that conduct research and develop new products, improvements, and other innovations.

If the firm has been in business for less than 5 years and has less than 5 million in gross receipts, the R&D tax credit can be applied to payroll taxes. This allows firms that have yet to profit to benefit.  

Can Manufacturing Companies Claim The R&D Tax Credit?

Yes. R&D tax credits for manufacturing provide significant savings for businesses in the industry. The Research and Development Tax Credit was created to encourage companies to innovate, develop, and improve their offerings. While initially thought to apply primarily to fundamental sciences research, a series of court cases showed evidence that many companies spent a substantial portion of their budget on what could be considered proper research and development. 

In the case of manufacturing companies, this can include improving your production processes, experimenting with new materials, or developing new product prototypes, any of which may qualify your business for these valuable tax incentives.

Many companies are unaware that everyday activities—such as refining production techniques or creating custom equipment—could qualify for the R&D tax credit. These tax credits have been expanded even more in recent years, making it easier for manufacturing companies of all sizes to benefit.

How to Claim R&D Tax Credits for Manufacturing

The process of claiming R&D for manufacturing can seem complicated at first, but it's rather easy once you break it down into manageable steps. Here’s what to do:

1. Check Your Eligibility

The first step to claiming the R&D tax credit for manufacturing is determining whether your business qualifies. Your company must meet the IRS's "Four-Part Test," which tests whether a research project counts for the tax credit by checking whether it is:

1. Developing or improving a product or process
2. Providing innovation and technological advancement
3. Overcoming uncertainty 
4. Engaging in a process of experimentation

Examples of activities that qualify include developing new prototypes, optimizing tooling for production, and experimenting with automation. 

The third and forth parts of the test are to make sure it uses the hard sciences in the development process, as we shall see later that things like marketing research don’t count towards the credit.

The Four-Part Test

To qualify for the R&D Tax Credit, your projects must be engaged in activities that pass the four-part test that was created by the precedent set by the 2023 IRS case:

1. Permitted Purpose – The project aims to create or improve the functionality, performance, reliability, or quality of a business component.
2. Elimination of Uncertainty – The project begins with uncertainty about how to achieve the project goal and involves work to eliminate this uncertainty.
3. Process of Experimentation – The project involves a systematic process of experimentation by evaluating one or more alternatives.
4. Technological in Nature – The experimentation relies on the hard sciences, such as engineering or computer science.

Although still somewhat subjective, using previous examples to show that one’s efforts fall within the four parts is the most straightforward way to claim your case.

2. Speak to a Tax Planning Team

If you do believe you may have a case for the R&D tax credit for manufacturing, then the next step is to ‘’’ the help of a tax planning professional. A tax attorney specializing in R&D tax incentives for manufacturing would be optimal, but any with experience with R&D tax credits is good.

They’ll help you to find and document all qualifying expenses in the company, as well as help you to navigate the paperwork and ensure the claims meet the standards of the IRS. 

Examples of R&D for Manufacturing

Numerous activities within the manufacturing industry can qualify for R&D tax credits. Below are a few common examples:

• Developing prototypes: typically using tools like computer-aided design (CAD) software.
• Improving production processes: usually through automation or robotics.
• Experimenting with materials: new materials can be used to improve the durability or performance of products.
• Creating custom equipment: for manufacturing a new product.
• Optimizing tooling: for better efficiency in production lines.

How The IRS Calculates the R&D Credit

The IRS uses two primary methods for calculating the R&D tax credit: the traditional and the Alternative Simplified Credit (ASC) method.

1. Traditional method – Document and calculate 20% of research expenses over a base amount. The base amount is a fixed-base percentage multiplied by the average annual gross receipts for the last 4 years.
2. Alternative Simplified Credit (ASC) method – This method calculates the credit based on 14% of the qualified research expenses (QREs) that exceed 50% of the average QREs for the 3 preceding tax years. If the company had no research expenses in any of the previous three years, the credit is 6% of the QREs for the current year​​.

The approach you should choose depends on the calculation method that best suits a company’s financial situation and R&D spending patterns.

How Much Can Manufacturing Companies Earn from the R&D Tax Credit?

The exact amount a manufacturing company can earn back through R&D tax credits depends on the amount spent on eligible research activities and qualified expenses. This includes, but is not limited to:

• Employee wages
• Materials used in experimentation processes
• Prototypes
• And other costs associated with the research and development of new technologies and manufacturing processes

Once the qualifying expenses have been identified, they can be claimed for a percentage against the business’s tax liability. 

There are also three additional ways to offset one’s costs to made aware of:

1. Some manufacturing companies may be eligible for R&D tax grants, which provide additional funding opportunities above those of the tax credits.
2. Small businesses, particularly those with under $50 million in gross receipts, may claim the R&D tax credit against the Alternative Minimum Tax (AMT) liability. This typically provides more cashback than without it.
3. Additionally, qualified start-up companies can use up to $500,000 of their R&D tax credit to offset payroll taxes, which provides a greater tax claim overall. 

Frequently Asked Questions

How Far Back Can You Claim R&D Tax Credits?

You can claim R&D Tax Credits for the last 3 tax years.

If your company has missed out, you still have a chance to amend past returns and get the credit.

This could lead to significant savings on already completed research and development initiatives.

Frequently Asked Questions

How Should Manufacturing Companies Document R&D Expenses?

In order to claim R&D tax credits for manufacturing, you need to keep detailed records of the R&D activities you’d like to claim. 

The key documents you’ll need include:

• Payroll records showing wages for employees engaged in R&D
• Records of supplies and materials used in the research process
• Detailed project reports outlining the nature of the research or experiments

With these, you can ensure your claim is accurate and can withstand IRS scrutiny.

What Doesn’t Qualify for the Credit as a Manufacturing Company?

While many unexpected activities do qualify for the R&D tax credit, some do not. Here is a list of just some important exceptions:

• Equipment or machinery purchased as a capital investment. 
• Research related to cosmetic changes
• Marketing data collection and research
• Routine improvements and maintenance of systems and processes

Only activities focused on overcoming technical challenges and resulting in innovation are eligible.

Start Your R&D Claim - Do You Qualify?

R&D tax credits for manufacturing companies are worth the time and effort for many businesses. If you suspect some of your activities may be R&D related, check if they qualify.

Keep in mind that many everyday activities related to design, prototyping, and process improvement may qualify for this credit, so don’t miss out on the potential savings.

Manufacturing companies can greatly benefit from these tax incentives in many cases by checking their eligibility, working with a tax planning team, and carefully documenting their research expenses. 

At RevenueSafe, we explore a business’s R&D methods and expenses to ensure a compliant claim of maximum value. Our process is simple, straightforward, and easy to use. So don’t wait, take the opportunity now to save money for your business.