You don't need a laboratory to claim the R&D tax credit. Every time your team designs a new product, engineers a custom solution or improves a production process, you may be generating a dollar-for-dollar tax credit.
The federal Credit for Increasing Research Activities (Internal Revenue Code Section 41) rewards businesses that develop or improve products and processes through technical problem-solving. Manufacturers do this every day, yet many never claim it because they think "R&D" means scientists in white coats.
The credit reduces your tax dollar-for-dollar, unused credits carry forward for up to 20 years, and many states offer their own credit on top.
An activity qualifies if it meets all four tests:
| Expense | What's included | Counted |
|---|---|---|
| Wages | Engineers, designers, technicians and machinists who perform, directly supervise or directly support qualified work | 100% |
| Supplies | Materials used up in prototypes, trial runs and testing | 100% |
| Contract research | US contractors and engineering firms doing qualified work for you | 65% |
| Computer use | Cloud computing used for simulation and development | 100% |
Wages are usually the biggest piece. A machinist who spends 30% of their time on prototype runs can contribute 30% of their wages.
If you build custom products under customer contracts, the key question is whether the research is "funded" by the customer. Generally you can still claim the credit if you bear the financial risk of failure (for example, on a fixed-price contract) and retain substantial rights to use the results. Contract terms matter, so they should be reviewed as part of any claim.
Most businesses use the Alternative Simplified Credit: generally 14% of qualified research expenses above half their three-year average (6% if there were none in any of the prior three years). As a rule of thumb, the net federal benefit is often 6% to 10% of qualifying spend. So a manufacturer with $1 million of qualifying wages and supplies might see a federal credit in the region of $60,000–$100,000 a year, before state credits.
The IRS has increased its scrutiny of R&D claims, and Form 6765 asks for more detail about each project, or "business component". Keep project lists, design files, test results, change orders and time records. A good study ties each dollar to a specific project and shows how the four-part test was met.
A short conversation with your engineering or production lead is usually enough to tell whether you qualify. Learn more about our R&D Tax Credits service or book a free consultation.
This article is general information, not tax, legal or accounting advice. Tax rules change and outcomes depend on your specific facts; speak with a qualified tax professional before acting.
Pre-profit startups can apply up to $500,000 of R&D tax credit against payroll taxes each year. Who qualifies, how the election works, and when you get the cash.
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