It’s a common misconception that the R&D tax credit only applies to activities performed by employees in a clean room wearing white lab coats. In fact, there’s a long list of industries that actually do qualify for the credit. Manufacturing, engineering, agriculture and even food catering all involve activities that may qualify for R&D credits.
Here's a look at some prominent industries (certainly not all industries) and the types of businesses that should be consulting specialized R&D tax credit experts to see if they qualify for valuable credits.
To get a general understanding of which activities qualify for R&D tax credits in any industry, it's best to use the Four-Part Test as your guide.
Technology
Business types: Software development, app development, telecommunications, electronics
Why they may qualify: The technology industry is well-suited for taking advantage of R&D tax credits if only for the fact that technology is continually evolving at a rapid pace. To keep up, companies constantly need to innovate and find new ways to bring value to their customers. This type of innovation requires significant analysis, design and testing to debug programs and determine the optimal user experience. Many of the activities to enhance and develop new functionality clearly qualify for the R&D tax credit.
Manufacturing
Business types: All businesses making or improving a product for yourself or others
Why they may qualify: Manufacturing requires a litany of internal processes to create a final product, and many of these activities fall under the umbrella of the R&D tax credit. Understanding customer requirements, designing the individual parts, setting up the production line and designing packaging are only a few of the activities that qualify for R&D.
An activity is likely to qualify for the tax credit if it is intended to improve a product or process for cost, quality, or reliability. With manufacturers constantly looking for ways to create better products at a lower cost, it's no wonder manufacturing represents approximately 70% of all R&D credits claimed.
Engineering
Business types: All involving an engineering function
Why they may qualify: Like manufacturing, engineering companies utilize many internal processes that meet the R&D tax credit requirements. And like technology, there’s a life cycle of activities that qualify.
As engineers work to create new designs or products, a tremendous amount of research is required to support those designs. Engineers will often test the effects new materials have on a known product or develop a prototype to test a completely new design. All of these activities meet the R&D tax credit requirements because they involve new and/or improved products and/or processes.
Life sciences
Business types: Medical devices, pharmaceuticals, biotechnology, recycling, agriculture
Why they may qualify: Qualifying activities in the life sciences industry typically lean heavily toward the "research" side of "research and development." Particularly in the medical device and pharmaceutical industries, getting a product from conception to general use takes years to complete.
But there are other ways life science companies can secure valuable tax credits. Just maintaining the laboratory equipment used in those studies could be a qualifying activity. If a new device requires significant testing to improve its effectiveness, that would also meet R&D tax credit standards.
The pharmaceutical, biotechnical, or biomedical industries typically experience a lot of qualified research during the medicinal prototyping, process development, and testing phases of their product. If you work in the life sciences industry and you’re doing anything to improve or develop a new product (like trying to lengthen drug shelf life or testing a new chemical compound), then chances are, you’re conducting qualifying R&D.
Regardless of the industry you work in, there may be opportunities to secure valuable tax credits. Consult with your R&D tax credit specialist for expert advice and guidance. You may find yourself reaping financial benefits that you can reinvest back into the business to be more competitive, grow faster and be more profitable.
