Most U.S. manufacturers qualify for the federal R&D tax credit — and most don’t claim everything they’ve earned.

What Is the Federal R&D Tax Credit?

The federal R&D tax credit (IRC Section 41) is a dollar-for-dollar reduction in tax liability for companies that invest in qualifying research and development activities. It’s been part of the U.S. tax code since 1981 and was made permanent in 2015, but it remains one of the most under-utilized incentives available to American manufacturers.

The credit applies to a wide range of activities that manufacturing companies do every day: developing new products, improving existing processes, engineering prototypes, and solving technical problems that don’t have an obvious answer at the outset.

Do Manufacturers Actually Qualify?

Yes; and more often than they think. Common qualifying activities in manufacturing include:

  • Designing and testing new product prototypes
  • Developing or improving manufacturing processes to increase efficiency or reduce waste
  • Engineering work to meet new performance, safety, or regulatory standards
  • Building or modifying tooling, fixtures, and production equipment
  • Creating custom software that controls or monitors manufacturing operations
  • Conducting environmental or certification testing related to new product development

The key is that the work must meet the IRS’s four-part test: it must be technological in nature, aimed at eliminating technical uncertainty, conducted through a process of experimentation, and intended to develop or improve a product or process—not just perform routine quality control or market research.

What Expenses Qualify?

Qualified Research Expenses (QREs) fall into three categories:

  • Employee wages — salaries and wages for employees directly performing, supervising, or supporting qualified research activities
  • Supplies — materials consumed in the research process (prototypes, test materials, etc.)
  • Contract research — 65% of payments to third-party contractors performing qualified research on your behalf

Expenses explicitly excluded include market research, advertising, quality control testing on finished goods, and research conducted outside the United States.

How Is the Credit Calculated?

There are two calculation methods:

The Regular Credit Method uses 20% of the amount by which current-year QREs exceed a calculated base amount tied to historical R&D spending. It’s more favorable for companies with a long R&D history but requires detailed historical records.

The Alternative Simplified Credit (ASC) Method is 14% of the amount by which current-year QREs exceed 50% of the average QREs from the prior three tax years. It’s simpler to calculate and the more commonly used method for manufacturers without deep historical R&D records.

What Changed with the One Big Beautiful Bill Act?

The One Big Beautiful Bill Act (signed July 4, 2025) reversed one of the most disruptive R&D tax provisions in recent memory. Under the Tax Cuts and Jobs Act of 2017, companies were required to capitalize and amortize domestic R&D expenses over five years rather than deducting them immediately. The OBBBA restored immediate expensing for domestic R&D activities, which significantly improves cash flow for manufacturers investing heavily in product and process development.

This is a meaningful change. Companies that had been spreading deductions over multiple years can now recognize the full tax benefit of R&D spending in the year it occurs.

New Filing Requirement: Form 6765 Section G

Starting with the 2026 tax year, the IRS is requiring businesses to complete Section G of Form 6765, which is a new disclosure requirement that asks for additional detail about qualifying research activities, business components, and the employees involved. This isn’t just a compliance formality. It’s a signal that the IRS intends to scrutinize R&D credit claims more closely, which makes proper documentation more important than ever.

The Documentation Challenge

This is where most manufacturers leave money behind or create audit exposure. R&D tax credits require contemporaneous documentation: records of what work was done, by whom, how much time was spent, and what technical uncertainty was being addressed. That documentation needs to exist throughout the year, not be reconstructed at filing time.

The IRS can audit R&D credit claims up to three years after filing, and a poorly documented claim that’s later challenged can result in credit disallowance and penalties. Manufacturing companies with complex projects, multiple product lines, or large engineering teams need a system that captures qualifying activity in real time.

Stacking Federal and State Credits

The federal R&D credit can be combined with state-level R&D credits for significantly greater combined benefit. States including California, Texas, Massachusetts, Pennsylvania, Connecticut, and others offer credits that stack on top of the federal credit. For manufacturers with operations in multiple states, understanding the interplay between federal and state programs—and how to document activities for each—can substantially increase total credit value.

How Boast Helps Manufacturers Claim More

Boast is a specialized R&D tax credit platform that combines AI-powered data collection with expert human review. Since 2011, we’ve helped more than 2,000 companies across North America access over $900M in R&D tax credits, and our 2026 Benchmark Report shows the average claim value now sits at $768,233, up 245% since 2018.

For manufacturers, we handle the work that most accounting generalists don’t have the bandwidth or specialization to do well: mapping engineering and production activities to qualifying criteria, building a system of record that withstands IRS scrutiny, and providing our 100% audit defense commitment if your claim is ever challenged.

The typical Boast client spends around five hours on the process. We handle the rest.

Ready to Find Out What You Qualify For?

Most manufacturers we work with are surprised by how much qualifying activity they’re already doing, and how much they’ve been leaving on the table. Book a free assessment with a Boast R&D tax credit specialist to see what your business is eligible for.

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