From spark to assembly line, the consumer and industrial product sector (C&IP) is where ideas meet industry. It drives innovation and breakthrough products by engineering across consumer goods, appliances and electronics, automotive, aerospace, and defense. These efforts fuel powerful innovation and discovery across materials science, software, and advanced manufacturing. As a result, C&IP has been one of the largest beneficiaries of the U.S. research and development (R&D) credit, also known as the research and experimental (R&E) credit.
Make Innovation Pay: R&D Tax Credit
The R&D credit reduces federal income tax dollar for dollar, can lower alternative minimum tax for corporations and individuals, offers a startup payroll tax offset, and generally lets you carry unused credits forward up to 20 years (and back one year). Many states also offer R&D credits, often refundable, transferable, or creditable against state taxes, amplifying the savings beyond the federal credit.
Legislative Change Fuels R&D
These advantages were tempered by the Tax Cuts and Jobs Act’s (TCJA) Section 174 rule for tax years beginning after Dec. 31, 2021, requiring capitalization and amortization of R&E costs over five years for domestic expenditures and 15 years for foreign expenditures. This increased taxable income and tax liabilities in the initial years, because only a fraction of the costs were recoverable through amortization.
On July 4, 2025, the One Big Beautiful Bill Act (the OBBBA or the Act) rolled back capitalization for domestic R&E costs for tax years beginning after Dec. 31, 2024, permitting an immediate deduction or elective capitalization over at least 60 months or up to 10 years. It also allows deduction of unamortized 2022–2024 R&E costs either entirely in the first tax year beginning after Dec. 31, 2024, or ratably over 2025 and 2026. The Act continues to require 15‑year amortization of expenses for R&E conducted outside the U.S. Some states have decoupled from the new rules, so R&E costs that are currently deductible for federal income tax purposes must still be capitalized and amortized in these states.
Small businesses (non–tax shelters) with average annual gross receipts of $31 million or less in 2025 were permitted to elect on their 2024 tax return to fully deduct domestic R&E expenses for tax years beginning after Dec. 31, 2021, by filing amended returns or by filing an accounting method change with their 2024 return.
It’s Not Rocket Science: Prove “the Four-Part Test” and Qualify
To qualify for the R&D credit, activities must satisfy all four parts of the test.
Permitted purpose
You’re trying to develop or improve a business component (a product, process, software, formula, or technique) in terms of function, performance, reliability, or quality
Technological in nature
The work relies on principles of hard sciences (engineering, physics, chemistry, biology, computer science). Marketing, aesthetics, and social sciences don’t count.
Elimination of uncertainty
At the start, you don’t know how to achieve the desired result (or whether you can). There is a real technical uncertainty about capability, method, or design.
Process of experimentation
You use a systematic approach to resolve that uncertainty, e.g., prototyping, testing, simulations, modeling, trial-and-error, and analyzing results to compare alternatives.
R&D in Action: Everyday Innovations That Qualify
Below are common C&IP activities that qualify for the R&D credit.
- Designing and testing new or improved products (performance, durability, energy efficiency, safety)
- Developing and refining manufacturing processes (yield, throughput, quality, automation)
- Building and evaluating prototypes, pilots, and preproduction trials (for experimentation, not routine production)
- Creating embedded software, firmware, and control systems for products or equipment
- Developing and testing new materials, formulations, and coatings, and pursuing lightweighting solutions to resolve technical uncertainties
- Implementing robotics, machine vision, and advanced controls to solve technical uncertainties
- Using simulation and digital twins to iterate designs and processes
- Conducting testing and validation to resolve technical uncertainties (excluding routine quality control)
Experiment. Document. Sustain: Turn Trial and Error Into Durable Credits.
The R&D tax credit is one of the most closely scrutinized incentives in U.S. tax history, because it is such a powerful planning tool. Over time, extensive guidance has emerged to help taxpayers substantiate their claims. It is essential to align contemporaneous documentation of qualifying activities with support for qualified research expenditures. As one IRS official put it, you can claim any amount, but you will only keep what your documentation can support. The burden of proof rests with the taxpayer, so you must be diligent in building and maintaining the proper documentation and support to fully realize the benefits of the R&D credit.
Supercharge R&D. Stack the Savings. Cut the Tax.
Turn experimentation into savings: deduct R&E costs and claim the federal R&D credit on the same activities to cut your tax bill. Then stack state R&D credits, if available. For states that have decoupled from federal Section 174A, you have the state credit to help neutralize extra state tax and amplify the payoff.
Contact a member of the CBIZ R&D Tax Credit Team to ensure you are taking full advantage of your potential R&D tax credits.
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