Manufacturing companies are the largest claimants of R&D tax credits, representing 35 percent of all claims and driving 70 percent of private-sector R&D. Yet many manufacturers still believe the credit is only for tech companies or labs with white coats.
That misconception is costly. If your manufacturing business is improving processes, automating production, or developing new products, you likely qualify.
Here is what qualifies and how to claim it under the new rules.
Why Manufacturing R&D Credits Matter Now
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, permanently restored immediate expensing for domestic R&D costs. For tax years beginning after December 31, 2024, manufacturers can once again deduct R&D expenses in the year incurred rather than amortizing them over five years.
What this means for you:
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Immediate cash flow relief instead of a five-year wait
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Ability to amend 2022-2024 returns if you qualify as a small business
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Full deduction for U.S.-based research; foreign R&D still amortized over 15 years
The Four-Part Test for Manufacturing Eligibility
To qualify, your manufacturing activities must meet all four IRS requirements under IRC Section 41.
1. Permitted Purpose
Your work must aim to improve the function, performance, reliability, or quality of a product or production process.
Examples:
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Developing a new product
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Improving an existing product (e.g., reducing weight while maintaining safety)
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Optimizing a production process
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Designing new tooling or fixtures
2. Technological in Nature
Research must rely on hard sciences: engineering, physics, chemistry, or computer science.
Examples:
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Testing materials for durability
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Engineering custom manufacturing equipment
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Developing automation systems
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Programming PLCs and robotics
3. Technical Uncertainty
You must have faced uncertainty about the capability, method, or design of the product or process.
Example: A manufacturer tests three different welding techniques to join dissimilar metals, uncertain which will achieve the required structural integrity.
4. Process of Experimentation
You must show systematic evaluation through prototyping, modeling, testing, or trial and error.
Example: A company tests 20 different material combinations to achieve a specific strength-to-weight ratio. The failed tests count too—the IRS rewards experimentation, not just success.
Qualifying R&D Tax Credits for Manufacturing Activities
Manufacturing activities that frequently qualify include:
Product Development:
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Designing and prototyping new products
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Improving existing product designs
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Developing custom components or formulations
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Evaluating alternative materials for durability, cost, or sustainability
Process Improvement:
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Developing new or improved manufacturing processes
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Automating assembly lines
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Implementing robotics or AI to enhance throughput
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Designing and integrating tooling, fixtures, and machine programming
Equipment and Technology:
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Programming and integrating PLCs for production control
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Developing custom software for manufacturing execution systems (MES)
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Engineering custom equipment for specific production needs
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Designing or retrofitting machinery
Testing and Quality:
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Testing new components, materials, or formulations
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Refining quality assurance and inspection procedures
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Meeting new regulatory or compliance standards through process changes
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Scaling up from prototype to full production
Even failed projects qualify. What matters is the systematic attempt to solve a technical challenge.
Which Expenses Qualify?
Qualified Research Expenses (QREs) for manufacturers include:
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Wages: Employees performing, supervising, or supporting qualified research (direct research, supervision, and support)
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Supplies: Materials consumed or scrapped during the research process, including pilot models used for evaluation
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Contract research: Up to 65 percent of payments to third-party researchers if the taxpayer retains rights to the results
What does NOT qualify:
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Activities after commercial production begins
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Routine quality control testing (unless testing new processes)
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Marketing, management, or administrative activities
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Foreign research (still amortized over 15 years)
New Rules Under OBBBA
Immediate Expensing Is Back
Starting in 2025, domestic R&D costs can be fully deducted in the year incurred. This reverses the TCJA’s five-year amortization requirement that took effect in 2022.
Retroactive Relief for Small Businesses
Small businesses with average gross receipts of 31 million or less over the past three years may elect to amend 2022-2024 returns and deduct previously capitalized R&D costs.
Deadline: Amended returns must be filed by July 4, 2026.
Section 179 Increase
OBBBA raised Section 179 expensing limits from 1.22 million to 2.5 million, with the phase-out threshold rising to 4 million.
Documentation Best Practices
Proper documentation is the key to successfully claiming R&D tax credits for manufacturing. The IRS and courts have made clear: contemporaneous records are required. Reconstructed studies assembled years later do not hold up.
What to track:
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R&D objectives and outcomes
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Technical challenges encountered
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Experimentation steps and alternatives tested
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Time spent by employees on qualified activities
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Materials consumed and scrapped
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Contract research invoices
How to track it:
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Use project codes to separate qualified R&D time from routine duties
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Maintain time-tracking or job-costing systems
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Keep engineering notebooks, lab records, and project files with dates
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Store all records in a usable, organized format
R&D Tax Credits for Manufacturing: Bottom Line
R&D tax credits for manufacturing are more valuable than ever. The OBBBA restored immediate expensing, expanded Section 179, and created retroactive opportunities for small businesses.
If you are improving products, automating processes, or developing new equipment, the credits are there.
Call (844) 463-2400 or email hello@indagotax.com to find out what qualifies in your manufacturing business.