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How Manufacturers Can Qualify for the R&D Tax Credit – It’s Easier Than You Think

Posted by Tony Deutsch on Thu, Jan 5, 2017

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RD_Tax_Credit-1.pngWhen you think of research and development, you probably think of men in white lab coats, or sophisticated laboratories where cutting-edge technology is born.

However, the federal government offers a more flexible definition of research and development. The government definition is a process of experimentation to develop new or improved products or processes that are technological in nature.

This means that activities regarded as mundane or routine by many manufacturers may qualify for the federal Research and Development – or R&D – Tax Credit.

Recent changes to the R&D Tax Credit are beneficial for small businesses. The 2015 PATH Tax Act – passed by Congress late in 2015 – retroactively reinstated and permanently extended the R&D credit.

The new law also:

  • Permits companies with less than $50 million in gross receipts to take the credit against their Alternative Minimum Tax (AMT).
  • Permits start-up businesses with gross receipts of less than $5 million to offset some of their payroll taxes with the credit.


The R&D Tax Credit is one of the most lucrative tax benefits available to manufacturers because it’s a dollar-for-dollar reduction in your taxes, unlike many benefits that are only deductions. The credit is generally about 6 percent for every dollar you spend.

An interesting fact about the R&D Tax Credit is you don’t even have to create a successful product or process to qualify. You can decide not to take your product to market and still qualify for the credit.

R&D Tax Credit Qualifying Activities by Industry How to Qualify

The IRS has a four-part test to qualify for the R&D Tax Credit. The four parts are:

  1. Technological in Nature: Research must be undertaken to discover information that is technological in nature and rely upon principles of hard sciences, which include biology, chemistry, engineering and physics, computer sciences, etc. (Not social sciences, economics, humanities or marketing)
  2. The Uncertainty Test: Expenditures must relate to activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product or process.
  3. Process of Experimentation: Substantially all of the research must contain elements of a process of experimentation, which is evaluating one or more alternatives, developing one or more hypotheses, testing or analyzing the hypotheses, or using “Trial and Error” experimentation.
  4. Permitted Purpose: The application of the research must be intended to be useful in developing new or improved function, performance, reliability or quality of the product, process or formula.


Expenses That Qualify

The R&D Tax Credit can be claimed for Qualified Research Expenditures, which can include both in-house research expenses and contract research expenses.

In-house research expenses include the following:

  • Wages paid to an employee who engages in, directly supervises, or directly supports qualified research.
  • Amounts paid for raw materials & supplies used during the process of qualified research.
  • Contract Research - amounts paid to outside consultants’/companies’ by the taxpayer for the conduct of qualified research.


Contract research expenses are 65 percent of amounts paid to persons other than employees for qualified research, or 75 percent for payments made to a qualified research consortium.

READ MORE: Manufacturers: Are You Receiving All the Tax Deductions to Which You’re Entitled?

What You Need to Document

Businesses claiming the R&D Tax Credit must maintain records that show a sufficient connection between qualified research expenditures and qualifying research activities. You need to keep record of your employees’ time spent on each qualified research project.

These records would include time sheets, research and project notes outlining the project, meeting notes discussing the project as it progresses, and other records prepared as the work is performed. While somewhat time consuming, applying for the credit can get you a good return on your investment since you will have already paid your employees anyway.

The R&D Tax Credit qualification rules are fairly complex, but we’ve helped many manufacturers determine if they’re eligible. Also, a study must be conducted for R&D Tax Credits, so there should be a tax/benefit analysis to determine if the tax savings will exceed the cost of the study.

If you’re a Pennsylvania-based manufacturer, the state also offers R&D Tax Credits in addition to the federal benefit.

For more information on the process for discovering whether your company qualifies for the R&D tax  credit, please contact our office.

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Topics: Manufacturing

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This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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