R&D Tax Credits in the Manufacturing and Distribution Industries

Both product and manufacturing process development associated with any of these components requires research to continually improve and stay competitive in their respective industries.

Manufacturing has always been the main focus of the research and development tax credit since its creation in 1981. Manufacturers across the United States that make consumer goods, food items, medical products, electronics, pharmaceuticals, automotive goods, furniture, heavy machinery, steel parts and tools and dies all are performing R&D activities. Both product and manufacturing process development associated with any of these components requires research to continually improve and stay competitive in their respective industries.

Companies are always seeking out new innovations for creating better, smarter, and more advanced product designs. The methods by which they manufacture these products are also under internal constant scrutiny and reconsideration to improve the efficiency and efficacy of production.

The goal is to create repeatable and intricate manufacturing procedures for building these new and improved products. In order to qualify for the credit under research and development, these companies can perform a variety of activities such as creating prototypes, production of first articles, and validation of essential components. The types of costs that would apply as research for qualification of the credit are expenses related to wages paid to employees of the company, the purchase of raw materials and supplies, and hiring outside contractors for the express purpose of conducting qualified research.

Qualified Research Activities for Manufacturing & Distribution Industry

The following are the many research and development activities that can be performed by a company looking to qualify for the R&D tax credit:

Development of conceptual designs and defining requirements and specifications for new or improved products
Use of CAD, CAM and CAE
3D printing and other additive manufacturing activities
Development of tooling, fixtures, and dies
Building and testing prototypes
Performing Finite Element Analysis (FEA) to validate 3D design models
Development of production processes and equipment
Evaluation and testing of new materials for product development
Designing cellular manufacturing systems and machine cell layouts
Software development associated with the manufacturing process (i.e. CNC machinery, PLC)
Designing and evaluating manufacturing process improvements such as those associated with:
  • Regulatory change
  • Automation and robotic technological advancement
  • Improvements associated with designing new quality standards and testing methods
Designing and building customized manufacturing equipment
Development of automated production and quality control processes
Case Study

Manufacturing and Distribution: Case Study in R&D

This company specializes in developing complex and highly sophisticated electronic products including emergency response systems, communications systems, data networks, digital media hubs, and various technologies for use in urban environments. The company may also design and develop the internal components of its products including mechanical, electrical, and software systems.  Research is performed by designers, mechanical and electrical engineers, software developers, computer engineers, CNC programmers, CAD designers, machinists, quality control and technicians.

Qualifications is R&D

The company commences a project by conducting initial deliberations for identifying established objectives and outlining a framework. Potential methods of problem-solving are then developed for the project to determine which path of development will be the most effective in achieving the intended goals of the project.

Once decided upon, the chosen path is developed further in detail and the engineering phase is started. The appropriate teams address all possible obstacles inherent to the project's core objectives such as form, fit, material, and performance concerns. Calculations and computer models are evaluated and modified as necessary.

Additional barriers to success related to material composition, configuration, and feasibility of manufacturing are addressed and multiple ideas for solving these issues are developed. For example, one of the most common concerns in redesigning printed circuit boards in electronic products is finding alternatives for placing the critical components on to the board itself. This typically requires considerable re-evaluation of multiple new layout schemes in order to successfully manufacture these boards once the design phase is complete.

The next stage is the development and construction of one or more prototypes and samples to assist in evaluating various configurations of components and their resistance to environmental conditions including heat and vibration. The materials that are most often employed in building a prototype for these purposes are structural metals, PC boards, circuits and wiring, transistors, plastics, and housings.

Testing of gain and bandwidth are also included for performance and reliability. More often than not, tests fail as circuitry, power, and electronic components are modified, and the testing environment is activated in an attempt to deliver new products to meet customer specifications. This development process is repeated until a successful component is designed and manufactured.

Results Speak for Themselves

This $40 million manufacturing company generates over $415,000 of annual R&D tax credits with R&D expenses of about $6.5 million.

Collect approximately


In combined federal and state tax credits

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Hire US-based engineers, developers, or scientists.
Designs and develops product prototypes and/or software.
Performs experimentation and validation on products, manufacturing processes, and/or software.
None of the above.

This calculator has been developed utilizing data from a variety of studies conducted in the industries listed. This is only an approximation based on a variety of assumptions and should be treated as such.

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