How to Claim R&D Tax Credits for Manufacturing: Outsource to India from the US

Are you a US manufacturer missing out on R&D tax credits, or unsure which of your processes could actually qualify? R&D tax credits are designed to reduce your tax liability while encouraging innovation in manufacturing. Recent IRS data highlights that manufacturers claim a large share of advanced manufacturing tax credits, particularly under Section 45X, which supports clean energy production. Following the Inflation Reduction Act, investments in manufacturing surged from $22 billion in 2020–2022 to $89 billion in 2023–2024.

But are you struggling with the complex documentation and compliance required to claim these credits? Outsourcing to India from the US helps cut costs and simplify tax credit preparation.  In this blog, you will learn how R&D tax credits for manufacturing work, what counts toward them, and how outsourcing can maximize your benefits.

Quick Insights for Manufacturers

• R&D tax credits reduce your tax liability while rewarding investments in product design, process improvements, and technology integration.
  
• Even smaller manufacturing firms can qualify if their projects meet the IRS four-part test, not just large corporations.
  
• Eligible costs include wages, supplies, contractor research, and cloud-based tools directly tied to qualified research projects.
  
• Common mistakes like misclassified expenses or overlooked outsourced research can shrink your credit value significantly.
  
• Outsourcing to India ensures accurate documentation, quicker claim preparation, and audit support while cutting administrative costs.

What Are R&D Tax Credits for Manufacturing and Why They Matter

R&D tax credits are government incentives that lower your tax liability when you invest in research and development activities. For manufacturing businesses, this means you can recover part of the costs spent on improving products, refining processes, or adopting new technologies. The purpose is simple: encourage innovation while reducing the financial pressure on your company.

Manufacturing is one of the largest beneficiaries of these credits. Advanced manufacturing tax credits under Section 45X accounted for 26.9% of the total tax credit market, reflecting the strong share claimed by the manufacturing sector in clean energy production alone. This shows the substantial role manufacturing plays in driving R&D-related tax benefits.

Here’s what makes these credits valuable to you as a manufacturer:

• Product Development: If you design new products or enhance existing ones, the costs tied to experimentation and testing may qualify for credits.
  
• Process Improvements: Modifying your production line to increase output, reduce waste, or improve quality can be treated as eligible R&D activities.
  
• Technology Integration: Implementing new machinery, adopting automation, or applying new materials often qualifies for R&D incentives.
  
• Energy Efficiency Projects: Efforts to reduce energy consumption or shift to cleaner inputs also contribute to eligible R&D claims.
  
  

To make these points more actionable, the table below shows typical R&D activities in manufacturing and how they connect to tax credit eligibility:

Also Read: R&D Tax Credit 2025: Changes, Filing, and Claims

By aligning everyday improvements with the IRS definition of research activities, you can turn regular investments into measurable tax savings. Understanding what R&D tax credits mean sets the stage for knowing how your projects can actually qualify.

How to Qualify for R&D Tax Credits in the Manufacturing Sector

To claim R&D tax credits, the IRS requires your activities to pass a four-part test. This test focuses on what you are doing in terms of research, not the size of your company or industry classification. That means even smaller manufacturing firms can qualify if their projects meet the criteria.

Here are the four IRS qualification criteria explained with manufacturing-specific examples:

1. Permitted Purpose
   
   • Your project must aim to create or improve a product, process, formula, or software.
     
   • For manufacturing, this could include designing a more durable machine part or improving the efficiency of an assembly line.
     
   • The end goal should be performance, quality, reliability, or cost reduction.
     
2. Elimination of Uncertainty
   
   • The activity must attempt to remove uncertainty related to the capability, method, or design of a product or process.
     
   • For example, you may not know if a new metal alloy will withstand high temperatures in production. Testing it in your facility would count toward this criterion.
     
   • The key factor is that you are addressing a technical challenge with measurable outcomes.
     
3. Process of Experimentation
   
   • You must use a systematic process of evaluating alternatives, modeling, simulating, or conducting trials.
     
   • In manufacturing, this could mean comparing two different molding methods to determine which delivers fewer defects.
     
   • Even small-scale trials or prototype adjustments can qualify under this step.
     
4. Technological in Nature
   
   • The research must rely on principles of engineering, physical sciences, or computer sciences.
     
   • For manufacturers, this could include applying physics to test machine vibrations, using engineering calculations for load capacity, or running software models for production flow.
     
   • Routine business decisions, such as changing marketing strategies, do not count since they are not technological in nature.
     
     

To make this clearer, the table below shows how the four-part test applies directly to manufacturing activities:

Eligibility depends entirely on your activities, not on whether your company is labeled as “high-tech” or “research-intensive.” If you are improving processes, products, or equipment with measurable results, you likely have qualifying R&D activities.

Once you know the IRS criteria, it helps to see concrete examples of qualifying activities in manufacturing.

Top Examples of Qualifying R&D Activities in Manufacturing

Many manufacturers assume R&D tax credits only apply to advanced laboratories or large corporations. In reality, day-to-day improvements in your production floor can also qualify. Even incremental changes that refine your products or processes can be eligible.

Here are the most common qualifying R&D activities for manufacturing:

1. Designing New Manufacturing Processes
   
   • Creating a new method to assemble components faster or with fewer defects.
     
   • For example, shifting from manual assembly to an automated conveyor system while testing its effectiveness.
     
2. Testing Prototypes
   
   • Building and evaluating prototypes to verify performance or durability before mass production.
     
   • A manufacturer developing a new plastic mold may build several versions and test them for heat resistance and wear.
     
3. Improving Machinery Efficiency
   
   • Modifying existing machines to increase throughput, reduce downtime, or lower energy consumption.
     
   • For instance, upgrading a press machine to handle higher loads while consuming less electricity.
     
4. Developing New Product Formulas or Materials
   
   • Experimenting with new raw materials or chemical compositions to achieve stronger, lighter, or more cost-effective products.
     
   • An example would be testing a new alloy for automotive parts to improve fuel efficiency.
     
5. Experimenting with Sustainable Methods
   
   • Implementing environmentally friendly production methods, such as recycling waste material or reducing emissions.
     
   • A factory may test alternative coatings that are less harmful to the environment but still meet durability standards.

After exploring examples, it’s essential to look at the expenses that typically count toward these credits.

Key Expenses That Count Toward R&D Tax Credits for Manufacturing

When claiming R&D tax credits for manufacturing, you need to focus on expenses directly tied to qualified research activities. These costs often occur during everyday operations and can be tracked if you maintain detailed records. Documenting them correctly ensures your credits are calculated accurately.

Here are the main categories of qualifying expenses you should evaluate:

1. Wages for Engineers, Plant Supervisors, or Technicians
   
   
   • Compensation for employees directly involved in qualified research, including their time spent on experiments, supervision, or direct support.
     
   • Example: A plant supervisor overseeing prototype testing or an engineer designing a new production line.
     
2. Supplies Consumed in R&D Projects
   
   • Raw materials, components, or other supplies that are used during experimentation and not part of finished goods for sale.
     
   • Example: Metals used in stress tests or chemicals consumed while developing new coatings.
     
3. Contract Research Outsourced to Third Parties
   
   • Payments made to external firms or consultants for conducting qualified research on your behalf.
     
   • Example: Hiring a testing lab to verify whether a new alloy can withstand extreme conditions
     
4. Software and Cloud Tools Used for Modeling and Simulations
   
   • Technology costs linked to designing, modeling, or testing improvements.
     
   • Example: Cloud-based simulation software used to model airflow efficiency in a new manufacturing process.
     

Along with these categories, many R&D-related roles across your organization may qualify. Below is a list of job titles often included in eligible wage expenses:

• R&D Manager
  
  
• Process Engineer
  
  
• Quality Assurance Tester
  
  
• Machinist Supervisor
  
  
• Product Development Engineer
  
  
• Prototype Technician

Beyond costs, the bigger question is whether these credits truly encourage further research investment.

Does the R&D Tax Credit Incentivize Manufacturing Research Investment?

The R&D tax credit is structured to push manufacturers like you to keep investing in new ideas, technologies, and processes. Instead of viewing R&D as a cost center, these credits help you recover part of the expenses, making research more sustainable and attractive. By lowering tax liability, you have more working capital available to improve products, optimize processes, and expand operations.

According to a 2025 report by the National Association of Manufacturers (NAM), US manufacturing companies reinvested nearly $350 billion in R&D during 2024 alone. The study shows that small to mid-sized firms can save between $50,000 and $250,000 annually through R&D tax credits, with 75% of R&D spending directly supporting workers’ salaries. This demonstrates that tax credits not only drive innovation but also sustain manufacturing jobs.

Here are some of the ways manufacturers typically reinvest tax credit savings:

• Expanding product development by funding additional testing and prototyping.
  
• Hiring more technical staff such as engineers, technicians, and quality assurance specialists.
  
• Investing in advanced equipment or automation to improve production capabilities.
  
• Supporting sustainable initiatives like reducing emissions or switching to cleaner materials.

The challenge many firms face is proper compliance and documentation when claiming these credits. If your records are incomplete or expenses misclassified, you risk losing eligible credits. 

Outsourcing compliance and documentation to India through experts such as VJM Global ensures that every qualifying dollar is captured. This not only maximizes the credit you receive but also allows you to reinvest more confidently into innovation and workforce growth.

Also Read: Effective Tax Planning Strategies for Startups

With investment benefits clear, you should also distinguish between deductions and credits to maximize savings.

Are R&D Expenses Tax Deductible or Just Eligible for Credits?

When you consider R&D expenses, it is important to understand the difference between deductions and credits. A deduction lowers your taxable income, which reduces the amount of income tax you owe. A credit directly reduces your tax liability, often dollar for dollar, making it more impactful.

For manufacturing businesses, both options can work together. You can deduct qualified R&D expenses as business costs and also claim R&D tax credits on top of that, provided you follow the IRS rules carefully. This combination can significantly increase your savings if planned correctly.

Here is a simple example to illustrate the difference:

• Suppose you spend $100,000 on qualified R&D activities.
  
• If you take it as a deduction and your tax rate is 21%, your taxable income drops by $100,000, reducing your taxes by $21,000.
  
• If you claim it as a credit instead, you could reduce your tax liability by $100,000 in direct credits (depending on eligibility).
  
• In many cases, you can apply both approaches, using deductions for part of the cost and credits for the rest.
  

This shows that credits are often more valuable, but the ability to claim both gives you maximum benefit. By keeping your expense records clear and accurate, you can take full advantage of both deductions and credits. Knowing the difference prepares you to follow a clear process for claiming your R&D tax credits.

Step-by-Step Process to Claim R&D Tax Credits for Manufacturing

Claiming R&D tax credits for manufacturing involves a defined process set by the IRS. If you approach it systematically, you reduce the risk of mistakes and increase the chances of receiving the full credit you qualify for.

Here are the five key steps you should follow:

1. Identify Qualifying Activities
   
   • Review your projects to see which activities meet the IRS four-part test.
     
   • Examples include improving production lines, testing prototypes, or designing new product formulas.
     
2. Collect and Document Expenses
   
   • Track wages, supplies, software, and contractor costs tied to R&D projects.
     
   • Maintain detailed time records for staff and receipts for materials.
     
3. Calculate the Credit Using IRS Form 6765
   
   • Use IRS Form 6765: Credit for Increasing Research Activities to determine the credit amount.
     
   • This involves applying either the regular credit method or the alternative simplified method.
     
4. File with Federal Tax Returns
   
   • Attach Form 6765 to your annual corporate tax return (Form 1120 for corporations).
     
   • Ensure that supporting documentation is available in case the IRS requests more information.
     
5. Prepare for Potential IRS Review
   
   • Be ready to provide project notes, payroll data, and expense documentation.
     
   • A clear audit trail will support your claim and reduce delays.
     

Tips to Avoid Errors

• Track wages by project: Record how much time each employee spends on qualifying R&D work to prevent misclassification.
  
• Separate eligible and non-eligible expenses: For example, distinguish between supplies consumed during testing and those used in standard production.
  
• Consider outsourcing compliance: Engaging offshore experts in India through firms like VJM Global helps ensure every step is managed accurately at lower costs.

Also Read: International Tax Planning Strategies for 2025

Even with a process in place, mistakes are common and can reduce the value of your claims.

Common Mistakes US Manufacturers Make When Claiming R&D Credits

Many manufacturers miss out on valuable tax credits because of errors in record-keeping or misunderstanding what qualifies. These mistakes often lead to denied claims, lost opportunities, or additional IRS scrutiny. Recognizing the most common issues helps you avoid costly setbacks.

Here are the mistakes you need to watch for:

• Misclassifying Expenses
  
  • Wages or supplies not tied directly to R&D projects are often included by mistake.
    
  • This leads to IRS rejections and potential penalties if non-eligible costs inflate your claim.
    
• Not Documenting Properly
  
  • Failing to maintain payroll records, project notes, or receipts weakens your case.
    
  • Without supporting evidence, even legitimate R&D work may be disallowed.
    
• Ignoring Small Projects
  
  • Smaller-scale experiments or incremental process improvements are often overlooked.
    
  • These activities may still qualify and, when combined, represent significant credits.
    
• Missing Outsourced R&D Claims
  
  • Work contracted to third parties, such as testing labs or engineering consultants, is frequently left unclaimed.
    
  • This results in leaving eligible credits uncollected, especially when outsourcing costs are substantial.
    

Consequences of These Errors

To avoid these pitfalls, many manufacturers turn to outsourcing their R&D credit processes to India.

Why US Firms Outsource R&D Tax Credit Processes to India

Managing R&D tax credit claims requires time, accurate records, and knowledge of IRS requirements. Many US manufacturers choose to outsource these tasks to India to lower costs and ensure precision. With the right offshore support, you reduce administrative pressure while capturing the full value of available credits.

Here are the main reasons outsourcing makes sense for manufacturers:

• Cost Efficiency
  
  • Hiring offshore teams in India costs significantly less than maintaining in-house specialists.
    
  • You gain access to skilled professionals without the overhead of salaries, benefits, or infrastructure.
    
    
• Access to Skilled Staff Familiar with US Standards
  
  • Indian outsourcing firms work extensively with US companies and follow IRS and US GAAP compliance rules.
    
  • This expertise ensures your R&D credit claims are aligned with federal requirements and ready for review.
    
    
• Scalability
  
  • As your research activities expand, offshore teams can quickly scale support without disrupting your operations.
    
  • Whether you run one project or multiple parallel initiatives, additional staff can be assigned as needed.
    
• Reduced Administrative Burden
  
  • Outsourcing eliminates the need to track every receipt, payroll entry, or project note internally.
    
  • Offshore teams handle documentation, calculations, and audit preparation so your staff can focus on core operations.
    

Added Benefits of Outsourcing

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This naturally leads to how VJM Global supports U.S. firms as a trusted outsourcing partner for R&D tax credits.

VJM Global: Outsourcing Partner for R&D Tax Credits in Manufacturing

Handling R&D tax credit claims requires precise expense tracking, reliable audit preparation, and compliance with both U.S. and Indian standards. By outsourcing to India with VJM Global, you reduce administrative pressure while ensuring every qualifying dollar is captured correctly.

Here’s how VJM Global supports manufacturers and CPA firms with R&D tax credit needs:

• Accounting Outsourcing Services
  
  • Tracks wages, supplies, contractor fees, and technology costs linked to qualified research activities.
    
  • Ensures accurate documentation so your claims are maximized.
    
• Audit Support for CPA Firms
  
  • Provides offshore capacity during busy tax seasons and audit cycles.
    
  • Helps validate R&D-related financials with complete, compliant documentation.
    
• Compliance Expertise Across Borders
  
  • Dual knowledge of U.S. GAAP and Indian regulatory frameworks.
    
  • Minimizes risks of IRS challenges, errors, or disallowed claims.
    
    
• Support Beyond R&D Credits
  
  • Assists U.S. companies expanding into India through setting up business in India.
    
  • Offers a scalable outsourcing model that adapts to seasonal or growth demands.
    

When you outsource to India through VJM Global, you gain lower costs, scalable teams, and audit-ready compliance support. This approach lets you focus on innovation while knowing your R&D tax credits are managed with accuracy and care.

Conclusion: How to Maximize R&D Tax Credits Through Outsourcing

R&D tax credits for manufacturing are more than just a tax break. They give you the financial flexibility to invest in innovation, upgrade equipment, and create jobs while reducing overall tax liability. For manufacturers, these credits are often the difference between delaying improvements and pushing forward with growth.

Are you claiming the full benefit of R&D tax credits, or leaving money behind? By outsourcing compliance and documentation to India, you can capture every eligible dollar while reducing administrative strain. This sets the stage for a smoother process and greater reinvestment in your business.

VJM Global specializes in helping US manufacturers outsource R&D tax credit work to India with confidence. From accurate expense tracking to audit-ready documentation, the firm combines US GAAP expertise with cost-effective offshore delivery. This approach ensures your claims are prepared correctly, saving you time and resources.

Schedule a consultation with VJM Global today and start maximizing your R&D tax credit savings.

FAQs

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Q: Can small manufacturing firms benefit from R&D tax credits?

A: Yes, even small manufacturers qualify if they document eligible projects. Incremental process improvements, testing prototypes, and material experiments often generate substantial tax credit opportunities.

Q: How can payroll tracking affect R&D tax credit claims?

A: Accurate payroll tracking ensures wages for eligible staff are included correctly. Misclassification often leads to reduced credits or rejected claims.

Q: What role do outsourced research labs play in credit eligibility?

A: Expenses paid to external labs or consultants usually qualify. Ensure contracts specify research deliverables tied to technical improvement or testing.

Q: Can sustainability-focused projects qualify for R&D tax credits?

A: Yes, sustainable initiatives like waste reduction, cleaner materials, or energy-efficient methods qualify if they meet the IRS’s technological criteria.

Q: How do manufacturers prepare for an IRS review of credits?

A: Maintain project notes, expense documentation, and payroll records. Outsourcing compliance tasks to India ensures your files are audit-ready and accurate.

Q: Can credits be combined with state-level incentives?

A: Yes, many states offer additional credits alongside federal ones. Combining them requires careful planning to avoid overlap or reporting conflicts.

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