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When most people hear “Research and Development,” they imagine high-tech labs, futuristic prototypes, or scientists in white coats. In reality though, Research & Development (R&D) Tax Credits are just as available to the manufacturing floor as they are to the science lab.
Many companies in manufacturing, logistics, software, and even professional services often overlook the research credit because they do not realize that their efforts to improve processes may qualify. If your business has worked on enhancing operational efficiency, reducing waste, developing or refining internal systems, or creating innovative solutions, you could be eligible for substantial R&D tax savings.
Streamlining or Automating Production
One of the most frequently overlooked sources of qualifying R&D activity lies in production process improvements. Efforts such as automating manual tasks, integrating robotics, or developing software-driven controls to enhance output, streamline workflows, or reduce human error can often meet the criteria for “qualified research” under the R&D credit.
Even if the final solution is already in place, the time spent developing, testing, and refining it, particularly when overcoming technical challenges or uncertainty, may qualify. Whether you are programming machine learning algorithms to guide robotics or developing custom scripts to optimize production line adjustments, these types of innovations often align with the IRS’s definition of qualified research.
To qualify, the project must involve a process of experimentation and aim to improve functionality, performance, quality, or reliability. Improvements to production throughput, equipment integration, or automated controls often check all the boxes.
Reducing Waste or Improving Product Quality
If your company has worked on cutting material waste, increasing product consistency, or improving performance, there’s a strong chance you are engaging in qualified R&D activities without even realizing it.
Projects like testing alternative material compositions, adjusting tolerances for improved durability, or refining heat or chemical treatments to extend product life may all qualify. The key is that your team encountered technical challenges and evaluated alternatives to reach the desired outcome.
For example, experimenting with eco-friendly materials, fine-tuning manufacturing processes to reduce scrap, or even enhancing product strength without increasing costs may be eligible.
One of the biggest research credit misconceptions is that the IRS requires success. Not true. Failed or abandoned experiments may still qualify for the R&D credit provided the work meets the IRS criteria and is properly substantiated. Read more about how to qualify for failed projects here.
Upgrading Internal Systems
Process improvements aren’t limited to the physical side of business. Efforts to upgrade or customize internal systems, like logistics, inventory management, quality assurance, or ERP platforms, may also qualify.
If your development team is building or customizing software to manage operations and if overcomes technical uncertainty in the process, these efforts may count toward your R&D credit. This includes activities like:
- Creating custom dashboards for quality control
- Automating internal workflows through custom-coded solutions
- Developing internal platforms to interface with multiple systems
Even if these tools are for internal-use-only, the R&D credit may apply if the effort involves substantial technical risk and innovative development.
Conclusion
Everyday improvements to your processes can translate into real tax savings, as long as they involve technical development and are properly documented. Whether you’re a manufacturer implementing smart automation, a distributor improving order accuracy, or a business experimenting with ways to make your operations leaner, these efforts and resulting R&D credit may fund your next wave of innovation.
KBKG’s team of tax professionals specializes in uncovering overlooked activities that can qualify for the R&D Tax Credit. Contact a KBKG expert today to see how to maximize benefits from process improvements.