Manufacturing accounts for over 10% of total U.S. economic output (National Association of Manufacturers, 2025). Yet when I sit down with plant managers and operations directors, the reaction is almost always the same: “We don’t do R&D. We make things.”
That’s exactly backward. Manufacturers are some of the best-qualified claimants for the R&D tax credit because manufacturing is fundamentally about solving engineering problems — developing new processes, improving existing ones, designing tooling, testing materials, reducing defects, and figuring out how to make something that meets specs. Those activities don’t happen in a lab. They happen on the shop floor, in the engineering office, and at the CNC machine. And the IRS considers them qualified research.
After 25 years helping manufacturers across aerospace, automotive, food processing, industrial equipment, and consumer products, here’s what I consistently find: most manufacturers are performing qualifying activities every day and claiming zero credit.
Key Takeaways
- Process improvements, tooling design, new product development, material testing, and production engineering commonly qualify — you don’t need a formal R&D department
- Supply expenses — prototype materials, testing consumables, raw materials used in experimentation — are a major QRE category that manufacturers frequently overlook
- The OBBBA’s new Qualified Production Property (QPP) designation offers 100% bonus depreciation on qualifying production facilities — a major additional benefit for manufacturers
- The four-part test applies to each business component separately — even a “routine” product can contain qualifying research at the process or tooling level
What Manufacturing Activities Qualify for the R&D Credit?
The IRS defines qualified research broadly: any activity that develops a new or improved product, process, technique, formula, or invention — as long as it passes the four-part test under IRC §41(d). For manufacturers, this covers a wide spectrum of daily engineering work. The key question isn’t whether you have a lab — it’s whether your team faces technical challenges where the solution isn’t already known.
Here are the activity categories we see most frequently in manufacturing R&D studies:
How Does the Four-Part Test Apply on the Shop Floor?
The four-part test works the same way in manufacturing as it does in any industry — but the examples look different than what most people imagine. Here’s how each part maps to real manufacturing scenarios:
Part 1: Section 174 Test
Is this R&D in the experimental sense?
A metal fabricator developing a new welding procedure for a material combination they haven’t joined before. The outcome is uncertain — they’re experimenting to find the right parameters. That’s R&D in the experimental sense.
Part 2: Technological in Nature
Are you applying engineering or science?
Manufacturing activities rely on mechanical engineering, materials science, thermodynamics, fluid dynamics, and electrical engineering every day. A CNC programmer optimizing a toolpath for a new geometry is applying mechanical engineering principles.
Part 3: Elimination of Uncertainty
Was the answer unknown when you started?
An injection molder doesn’t know if a new resin will fill a complex tool geometry without short shots or sink marks. A stamping company isn’t sure if a progressive die design will hold tolerance across a 500,000-piece run. Those are genuine technical uncertainties.
Part 4: Process of Experimentation
Did you test alternatives?
Running test cuts at different speeds and feeds. Trying three different fixture configurations. Building prototype parts in multiple materials. Adjusting mold temperatures and pressures through a DOE. That’s all process of experimentation.
The process vs. product distinction: Under IRC §41(d)(2)(C), any plant process, machinery, or technique for commercial production is treated as a separate business component. This is critically important for manufacturers. Even if the product you’re making is well-established, the process you’re developing to make it can independently qualify for the R&D credit. A new machining approach for an existing part, a redesigned production line for an existing product — these are their own qualifying business components.
The Five Activities Manufacturers Miss Most Often
In our experience, every manufacturer we evaluate has qualifying activities. But most have been claiming only a fraction of what they’re entitled to — or nothing at all. Here are the five activity categories that get missed most frequently.
First-article development and qualification runs
When you win a new job and run first articles — dialing in the process, adjusting parameters, testing and measuring until parts meet spec — that’s experimentation. Most manufacturers treat this as “setup cost” and never claim it. It’s often the richest source of qualifying hours.
Tooling and die design iterations
Designing, building, and testing custom tooling — progressive dies, injection molds, weld fixtures, assembly jigs — involves significant engineering uncertainty. When you iterate through multiple designs to hit a dimensional or cycle-time target, that’s the four-part test in action.
Scrap and defect reduction engineering
Running DOEs to identify root causes of defects. Redesigning processes to eliminate failure modes. Testing parameter changes to reduce scrap rates. This is exactly the kind of systematic experimentation the four-part test rewards — and it happens on nearly every production floor.
Automation and PLC programming
Designing robotic workcells, writing PLC logic for new processes, integrating vision systems, developing custom HMI interfaces. When the programming involves technical uncertainty about whether the system will perform as required, the development time qualifies.
Supply expenses from prototype and test runs
Raw materials consumed during development, prototype runs, and testing are qualified supply expenses — a QRE category many manufacturers completely ignore. The metal, resin, chemicals, or other consumables used before production starts can represent a significant credit component.
From our practice: The manufacturers who benefit most from R&D studies aren’t the ones with the biggest engineering departments — they’re the ones with the most job diversity. A machine shop running 200 different part numbers per year has 200 potential business components, each with its own process development history. A custom fabricator solving new engineering problems on every project generates qualifying activities continuously. If your work is never quite the same twice, you’re almost certainly sitting on unclaimed credits.
What Manufacturing Activities Don’t Qualify?
The exclusions matter just as much as the qualifications. Claiming non-qualifying activities weakens your entire study and increases audit risk. Here are the manufacturing activities the IRS explicitly excludes:
Activities that don’t qualify:
| ✕ | Routine production runs — once the process is established and you’re manufacturing to established parameters, the production itself doesn’t qualify |
| ✕ | Quality control inspection — testing finished products against established parameters to confirm they meet spec. However, developing new QC methods or investigating root causes of failures can qualify |
| ✕ | Reverse engineering — duplicating an existing product from physical examination, drawings, or publicly available specifications without introducing technical uncertainty |
| ✕ | Routine maintenance — standard equipment maintenance, calibration, and repair following established procedures |
| ✕ | Customer adaptation without uncertainty — modifying an existing product to a customer’s dimensions or finish requirements when the modification involves no technical challenge |
The gray area that matters: The line between “routine quality control” (excluded) and “quality improvement engineering” (potentially qualifying) is where manufacturers most often need expert help. Inspecting parts against a spec? That’s QC — it doesn’t qualify. But running a DOE to figure out why parts are failing and redesigning the process to fix the root cause? That’s experimentation aimed at eliminating uncertainty, and it does qualify.
Qualified Research Expenses: What Manufacturers Can Claim
Manufacturing R&D studies often yield larger credits than you’d expect because manufacturers have significant costs in all three QRE categories — not just wages.
Wages
Engineers, toolmakers, machinists, CNC programmers, quality engineers, production supervisors directly involved in qualifying research. Remember: if 80%+ of their work qualifies, all wages count.
Supplies
Raw materials for prototypes and test runs, testing consumables, tooling materials used in design iterations, chemicals, coatings, and adhesives tested during development. This is the category manufacturers miss most.
Contract Research
65% of payments to outside labs, testing facilities, engineering consultants, or contract design firms performing R&D on your behalf. Material testing, finite element analysis, and prototype fabrication by third parties all count.
The OBBBA: Extra Benefits for Manufacturers in 2025-2026
Legislative Update
The OBBBA delivered two major wins for manufacturers beyond the R&D credit itself.
OBBBA Benefits for Manufacturers
Qualified Production Property (QPP)
The OBBBA introduced 100% bonus depreciation for certain nonresidential real property used in qualified production activities. This can convert qualifying manufacturing facilities from 39-year depreciation to immediate expensing — a massive cash flow benefit on top of the R&D credit. Combined with a cost segregation study, the tax savings on a production facility can be extraordinary.
Section 179 doubled to $2.5 million
The OBBBA doubled the Section 179 expensing limit from $1.25 million to $2.5 million, with a phase-out threshold of $4 million. For manufacturers investing in new equipment, this means significantly larger immediate deductions.
Section 174A immediate R&D expensing
Domestic R&D costs are once again fully deductible in the year incurred — ending the painful 5-year amortization that had been in effect since 2022. Small manufacturers (under $31M gross receipts) can retroactively apply this to 2022-2024 by July 6, 2026.
Stack these strategies: For a manufacturer who owns their production facility, the optimal approach is to claim the R&D credit on qualifying engineering and development activities, perform a cost segregation study on the building to accelerate depreciation, evaluate QPP eligibility for the facility itself, and use Section 179 on new equipment purchases. We regularly see manufacturers who implement all four strategies in the same tax year generate six-figure combined savings. Our team evaluates all of them simultaneously.
Making Things? You’re Making Qualifying R&D.
We’ll walk through your engineering activities, identify qualifying projects and expenses, and estimate your credit value — at no cost. Most manufacturers we evaluate have never claimed the R&D credit. Yours might be next.
Frequently Asked Questions
We’re a job shop — do we qualify?
Job shops are often excellent candidates because every new job can involve process development — new setups, new tooling, new programming, and first-article qualification. If your machinists and engineers are solving different technical problems on each job, you have a continuous stream of qualifying activities.
Does CNC programming qualify?
It can, when the programming involves technical uncertainty. Writing a program for a complex geometry where the toolpath, speeds, feeds, or fixturing approach isn’t predetermined — and requires testing and iteration — is a qualifying activity. However, programming a simple repeat part using established parameters typically doesn’t qualify.
What about Lean or Six Sigma projects?
Some Lean/Six Sigma activities can qualify — particularly when they involve technical experimentation (DOEs, process parameter optimization, root cause analysis with engineering solutions). But management studies, efficiency surveys, and purely organizational improvements don’t qualify under IRC §41(d)(4). The distinction is whether the project applies engineering principles to resolve technical uncertainty.
Can we claim credits for work done by shop floor employees?
Yes. The IRS evaluates what employees actually do, not their titles. Machinists running test cuts, welders qualifying new procedures, and technicians running experiments all perform qualifying services — even if their job title doesn’t include the word “engineer.” The wages of any employee who directly performs, supervises, or supports qualified research can be claimed.
How much is the R&D credit typically worth for a manufacturer?
It varies widely based on the volume of qualifying activities and expenses. A mid-size manufacturer with $5 million in engineering and production development payroll might generate $300,000-$500,000 in annual credits. But we’ve seen smaller shops with highly qualified activities generate credits that cover the cost of a new machine. Read our complete R&D tax credit guide for calculation methods.
What Should You Do Next?
If your manufacturing operation involves any combination of new product development, process engineering, tooling design, material testing, or automation — and you’ve never claimed the R&D credit — you’re almost certainly leaving money on the table.
The first step is simple: schedule a free consultation. We’ll walk through your operations, identify which activities and employees qualify, and give you a realistic estimate of the credit value. We’ve helped manufacturers across aerospace, automotive, industrial equipment, food processing, and consumer products claim credits they didn’t know they’d earned.
Learn more about the IRS four-part test →
If you own your production facility, explore cost segregation →
CPAs: partner with us to offer R&D credits to your manufacturing clients →
Martin Gamez
Founder, Tax Formulations
Martin is a tax credit specialist with over 25 years of experience in federal and state R&D tax credits, cost segregation, and business tax incentives. His background includes tenure at Big Four and Top 10 accounting firms, with clients spanning technology, manufacturing, aerospace, engineering, and life sciences. Read full bio →