Manufacturing is one of the largest industries in the United States, accounting for approximately 11% of GDP. Almost everything we enjoy on a daily basis – whether it’s the car we drive or the television we play video games on, is made possible because of manufacturing companies.

Due to global competition to produce the highest quality goods, cheaper and faster, manufacturing also tends to be a breeding ground for innovation. This innovation can take many different forms, including cutting-edge robotics, artificial intelligence, and methods for precise machining. As an industry that’s heavily involved in research and development, manufacturing companies are uniquely positioned to take full advantage of R&D tax credits to help offset some of their research costs.

How does a manufacturing company qualify for the credit?

There is a four-part test used to determine whether a company has a project that qualifies for the R&D Tax Credit. If you have a project that meets each of the four quadrants below, your project most likely qualifies.

Technological in nature

  • Discover information that fundamentally relies upon principles of Hard Sciences (i.e. Physical Sciences, Biological Sciences, Engineering, Computer Science, etc.)
  • Not social, economic, or psychological Permitted Purpose

Permitted Purpose

  • Develop a new, or improve an existing, product or process
  • Related to Functionality, Performance, Reliability, Quality, Significant cost, Savings, etc.
  • Not Aesthetics
Four Part Test

Eliminate Uncertainty

  • Capability
  • Uncertain if able to achieve desired result
  • Methodolgy
  • Uncertain of optimal design or process to achieve project goals
  • Goals to show there were issues and potential alternate solutions

Process of Experimentation

  • Evaluate and test alternative design or process to identify optimal solutions
  • Methods to use
  • Prototyping
  • Modeling
  • Systematic Process of Trial and Error
  • Simulation
  • Computer Science Testing (Validation, Beta, etc.)

Once a company determines that their project meets these criteria, three expense categories factor into the tax credit calculation:

Wages