R&D Tax Credits for Metal Fabricators

Summary

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Metal fabricators are often overlooked when it comes to Research & Development (R&D) tax credits, which is a mistake that could be costing shops real money. If your operation involves designing custom tooling, developing new fabrication processes, testing different welding or forming techniques, or working through engineering uncertainty to hit a customers’ specifications, you may qualify for the federal R&D tax credit under the Internal Revenue Code (IRC) §41.

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The Metal Fabrication Industry is a Natural Fit for R&D Credits

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Though many people hear “research and development” and assume that the work must be taking place in labs or high-tech spaces, the reality is that the IRS’s definition of qualified research under IRC §41 is broader than most business owners realize.

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Metal fabrication involves engineering in many of its processes. Every time a shop is handed a new set of specs and needs to figure out how to meet them, you’re doing something that might qualify in the eyes of the tax code.

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It is not a deduction or a loophole; this tax credit is a dollar-for-dollar credit against your federal tax liability. Qualifying businesses can receive a credit equal to 6-14% of qualified research expenditures, depending on which calculation method they use (the Regular Credit Method or the Alternative Simplified Credit method, which you read more about here).

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The Four Part Test: Does Your Metal Fabrication Work Qualify?

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To claim the credit, each activity must pass the four-part test established under IRC §41(d). Here is how each part applies to metal fabrication:

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1. Permitted purpose. The research must aim to develop a new or improved product, process, software, technique, formula, or invention (a “business component” under the IRS definition). For fabricators, this means developing improved manufacturing processes, custom tooling designs, or better methods for producing a part or assembly to a customer’s specification.

2. Technological in Nature. The work must rely on principles of engineering, computer science, physics, chemistry, ro biological science. Metal fabrication is grounded in mechanical engineering, material science, and metallurgy by definition, and therefore often meets this part of the four-part test.

3. Technical Uncertainty. There must be genuine technical uncertainty about the capability or method of achieving the desired results. In fabrication, this could mean not knowing whether a given bend sequence will hold tolerance, where a specific weld approach will meet strength requirements, or whether a new die configuration will produce the part within specification.  

4. Process of Experimentation. The IRS requires a systematic process of evaluating alternatives to resolve the uncertainty. This doesn’t require a formal lab setup; trial-and-error counts, provided that it is systematic and has documentation. Testing different weld parameters, iterating on a die design, running prototype parts to evaluate different forming sequences – these all may qualify as a process of experimentation when you’re tracking what you tried and what the outcomes were.

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What Activities in Your Shop May Qualify?

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You don’t need a dedicated R&D department in order to qualify for R&D tax credits. Many activities that are parts of day-to-day operations can constitute as qualified research when they involve technical uncertainty and process of working through alternatives. Some examples of this include:

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- Developing new or improved manufacturing processes, including the design of custom tooling, jigs, dies, fixtures, and forming equipment.

- Engineering work during the quoting process. If your team is evaluating how to manufacture a new part, determining bend, allowances, or designing the fabrication sequence, that time can qualify, even if you didn’t win the job.

- Prototype and first-article development, including computer-aided design (CAD) work, shop drawings, and iterative testing to bring a part to print.

- Testing and evaluation of alternative welding techniques, forming methods, or material selection to meet customer specs.

- Programming computer numerical control (CNC) equipment, laser cutters, turret presses, or other automated systems for new or significantly modified parts.

- Developing or optimizing processes to meet specific tolerances, finish requirements, or strength criteria where the outcome isn’t certain in advance.

- Testing new alloys, coatings, or surface treatments to meet performance requirements.

- Automation and process integration, like designing and testing new automated production systems or integrating new equipment into existing workflows.

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Things that will likely not qualify under the code are routine production runs using already established processes, standard quality control inspections, cosmetic modifications, or activities that simply repeat what your shop already knows how to do.

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What Expenses Can You Claim?

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Under IRC §41(b), qualified research expenditures (QREs) fall into three categories:

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• Wages: Employee wages paid for time spent directly performing, supervising, or directly supporting qualified research. This includes engineers, programmers, machinists, and technicians whose time is tied to qualifying activities. (IRC §41(b)(2)(A))

• Supplies: Materials consumed or used in the conduct of qualified research. This includes raw materials, prototype parts, tooling, and consumables used during development and testing — not capital equipment. (IRC §41(b)(2)(B) and Treas. Reg. §1.41-2(b))

• Contract Research: 65% of amounts paid to third parties to perform qualified research on your behalf, provided the agreement meets the requirements of Treas. Reg. §1.41-4(a)(5). (IRC §41(b)(3))

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Documentation

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Documentation is a critical piece of filing a claim for R&D tax credits. The IRS can challenge R&D credits for businesses that can’t substantiate their activities and costs. The recent George v. Commissioner (T.C. Memo. 2026-10) decision reinforced this point: even where some activities may qualify, inadequate records can mean leaving money on the table. The court allowed only part of the taxpayer’s claimed credits because the taxpayer could not substantiate the full amount claimed.

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Documentation does not need to be highly scientific. For metal fabricators, some documentation that is recommended includes:

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- Time records for employees performing, supervising, or directly supporting qualifying activities. Even informal tracking is better than none.

- Project-level records identifying the technical uncertainty you faced, the alternatives you considered, and how you resolved it.

- Documentation of prototypes, first articles, test runs, and outcomes. Even failures may still qualify.

- Materials used in development and testing.

- Engineering notes, CAD revisions, and work orders that capture development processes as they happen.

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The best records are contemporaneous or created at the time the work is happening. Keeping notes on what you’re performing, testing, and what happened during the research can be sufficient, and a qualified R&D tax professional is capable of helping you compile that documentation in the proper way.