Unlock Thousands in Savings: How R&D Tax Credits Can Benefit Your Business

Innovation is at the core of modern manufacturing and consumer products companies. Whether it’s optimizing production lines, reformulating products to enhance shelf life, or implementing automation, technical problem-solving happens daily across the sector. Yet many manufacturers overlook one of the most valuable tax incentives: Federal and State Research and Development (R&D) tax credits.

For CEOs, CFOs, controllers, and operations leaders intent on enhancing margins, optimizing tax liability, and accelerating innovation, understanding R&D tax credit eligibility is essential. This credit recognizes and rewards companies for initiatives they already undertake frequently without realizing these initiatives meet the definition of research and development.

Why the R&D Tax Credit Matters for Manufacturers and CPG Companies

The R&D tax credit encourages U.S. innovation and helps businesses reinvest in research and development, as well as production, product development, and process improvement. For those in the food and beverage, consumer packaged goods, and manufacturing industries, it is a critical tax savings tool. The credit strengthens cash flow and supports long-term growth by providing tax benefits on expenses businesses are already incurring in their daily operations.

There are two primary tax benefits:

Income Tax Reduction

Any manufacturer with qualifying R&D expenses (money spent on eligible research and development activities) can use the credit to reduce federal income tax on a dollar-for-dollar basis.

Payroll Tax Offset for Small Businesses

Early-stage companies with less than $5 million in current-year gross receipts (total money received before expenses) and fewer than five years of revenue history may offset (use the credit to reduce) up to $500,000 in payroll taxes each year. This is especially valuable for early-stage companies operating at a loss but conducting significant R&D.

What Counts as R&D? IRS Four-Part Test Explained

A common question from executives is: “Which activities qualify for the R&D tax credit?” To qualify, activities must satisfy the IRS four-part test. A clear understanding of these requirements is crucial for CEOs and CFOs seeking to take advantage of the R&D tax credit.

1. Technological in Nature

Activities must rely on a hard science, such as engineering, chemistry, physics, biology, or computer science.

2. Permitted Purpose

The work must aim to enhance performance, functionality, reliability, or quality of a product or process. This applies in areas such as food safety, sustainable packaging, cleaner ingredient profiles, automation projects, and throughput improvements.

Examples of activities that often qualify in manufacturing and consumer products include:

Subjective work, such as taste testing or cosmetic design, does not qualify unless paired with technical development.

3. Technical Uncertainty

At the outset of the project, the company must face uncertainty about:

Examples in manufacturing:

4. Process of Experimentation

Companies must evaluate multiple approaches, conduct trials, or iterate designs to reach their final product.

This may include:

This mirrors the scientific method and is often part of daily operations in manufacturing plants and product development teams.

Does Outsourced Manufacturing Qualify?

Many companies also wonder: “Can I claim the R&D credit if I use a co-manufacturer/co-packer?” The answer is YES, with a caveat. Eligibility depends on which party bears economic risk and substantial rights.

Substantial Rights

The business must retain rights to the IP, formula, specifications, or process knowledge generated through the research.

Economic (Financial) Risk

The IRS evaluates how the co-manufacturer is paid:

Understanding contract structures is vital for compliance and for executives aiming to maximize R&D tax credit benefits.

Examples of Qualifying Activities in Manufacturing and Consumer Products

Many companies believe their work is too routine to qualify as R&D. In reality, the following activities often meet IRS standards:

Product Development and Reformulation

Manufacturing Process Improvements

Whose Time Qualifies for the R&D Credit?

If an employee participates in technical testing, development, or evaluating alternatives, a portion of their time may qualify.

What Expenses Qualify for the R&D Tax Credit?

The IRS recognizes three main expense categories for manufacturers:

Example: How R&D Expenses Translate Into Tax Savings

A mid-sized manufacturer conducting product and process development may accumulate:

Total qualified research expenses (QREs), meaning the sum of wages, supply costs, and contractor payments that meet IRS requirements for research activities: $8.2M.

This can result in an R&D tax credit of approximately $580,000, or roughly 7% of eligible expenses.

Manufacturers often see annual credits in the 7 to 10 percent range, depending on activity mix and state incentives.

2026 R&D Documentation Requirements: What CEOs and CFOs Must Know Now

Starting in the 2026 tax year, companies must provide more upfront detail on Form 6765 when claiming the R&D credit. CEOs and CFOs should strengthen documentation now.

Required disclosures will include:

Strong documentation and project tracking are vital for compliance and credit sustainability. Many states, like California, Texas, and New Jersey, also offer R&D incentive programs. Companies in these states can often claim both federal and state credits.

Why Now Is the Right Time to Reevaluate Your R&D Strategy

Manufacturing and consumer products companies should reassess R&D credit opportunities due to:

Together, these factors make the R&D tax credit one of the most effective tax strategies for the industrial and consumer products sectors. Whether creating new products, validating formulations, resolving process inefficiencies, or implementing automation, manufacturers and consumer product companies frequently engage in qualifying R&D without realizing it. Understanding IRS rules, keeping accurate records, and reviewing R&D opportunities annually can yield significant tax savings and drive ongoing innovation across the organization.

Authors: Darcey Long | [email protected] and Derek White, Principal | [email protected]