Tariffs Are Hitting Manufacturers Hard. R&D Tax Credits Can Help You Fight Back.

Summary

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Tariffs are increasing costs for manufacturers who import materials and supplies necessary to their production methods. Steel, aluminum, and copper are all subject to high tariffs, with the latest increases to steel and aluminum increased to 50%, with derivative products at 25%, increasing costs significantly. Companies are now searching for ways to offset these costs.

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The problem-solving work that has resulted from these tariffs, such as reformulating, retooling, or redesigning, may qualify for research and development (R&D) tax credits. The money being spent to adapt may be partially recoverable.

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The Tariff Problem Manufacturers are Facing

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Manufacturers across the United States are dealing the ripple effects of broad tariff increases. Steel, aluminum, electronic components, and raw materials have increased in cost, compressing margins and putting companies under pressure to find efficiencies and/or alternatives.

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Many companies are responding the only way the can: by changing how they operate.

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- Sourcing alternative domestic or lower-tariff materials.

- Redesigning products to reduce tariff exposure.

- Retooling production lines to accommodate new inputs

- Evaluating reshoring operations to bring supply chains back to the U.S.

- Developing new processes to maintain quality while cutting costs.

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Here is the part that many manufacturers don’t realize: all the testing, prototyping, experimentation, failure, and refinement may qualify for the R&D tax credit.

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What Counts as R&D?

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The R&D tax credit under Internal Revenue Code (IRC) Section 41 does not require a dedicated research lab or a team of scientists. The four-part test established by the IRS is laid out clearly:

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• Permitted Purpose: The activity must be aimed at developing or improving a product, process, technique, formula, or software.

• Technological in Nature: The work must rely on engineering, physical or biological science, or computer science principles.

• Technical Uncertainty: The activity must involve an attempt to resolve genuine technical uncertainty about how to achieve the goal.

• Process of Experimentation: Your team must be testing alternatives, evaluating approaches, and refining outcomes — not simply following a known, established method.

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For a manufacturer adapting products or processes to tariffs, this four-part test is not a stretch. When a company’s engineering team spends months testing whether a substitute material can perform to spec, that is a process of experimentation aimed at eliminating technical uncertainty. When a production team retools a line to handle a new component and has to iterate through failures to get it right, that may qualify as well. There may be activities your company is performing that you don’t even realize qualifies for R&D tax credits.

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Specific Activities That May Qualify

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Material Substitution and Reformulation

When a tariff drives up the cost of a key input, the natural response is to find an alternative. But substituting new material is rarely simple. Your team will need to test whether the new material meets strength, durability, and performance standards, often under a range of conditions. The testing process – hypothesis, trials, and documentation of what worked and what didn’t – is the heart of a qualified research activity.

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Product Redesign

Some manufacturers choose to redesign components or end products to reduce or eliminate tariff-exposed parts. This might mean changing dimensions, construction methods, or product assembly. When the redesign involves genuine engineering uncertainty – i.e. your engineers do not know what the outcome will be and requires iterative testing – that may qualify.

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Reshoring and Supply Chain Adaptation

Bringing production back to the U.S. or shifting to domestic suppliers often requires rebuilding processes from the ground up. Developing new manufacturing techniques, qualifying new suppliers, or adapting equipment to run with different inputs all involve technical problem-solving which may qualify for the credit.

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Process Automation and Efficiency Projects

Some products cannot change materials or design due to strict performance guidelines. Instead, some companies have turned to automation to protect or increase margins. Designing or adapting robotic systems, writing new Programmable Logic Controllers (PLC) or Computer Numerical Control (CNC) programs, or integrating new control systems are activities that carry inherent technical uncertainty and regularly qualify as R&D.

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Tooling and Prototype Development

Custom tooling developed to work with new materials or new product designs, and the prototypes built and testing during the development process, are recognized qualifying activities under the R&D tax credit framework.

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The OBBBA Makes the Timing Perfect

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On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law, and one of the most significant provisions was the introduction of IRC Section 174A, which restored immediate expensing for domestic research & experimental (R&E) expenditures. Before the change, businesses had been required to amortize those costs over five years, which was a serious cash flow problem for companies investing heavily in R&D.

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Under Section 174A, domestic R&D expenses are now fully deductible in the year they are incurred. For a manufacturer that is spending significant dollars this year on tariff-response R&D, that full deduction is available immediately.

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There is also a retroactive opportunity. For qualifying small businesses with average annual gross receipts of $31M or less (as measured under IRC Section 448(c)), the OBBBA allows an election to amend tax returns for 2022 through 2024 to deduct previously amortized R&E costs. If your manufacturing business was doing this kind of development work in those years an meets the gross receipts threshold, there may be refunds available to you.

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IMPORTANT TO NOTE: The deadline for the retroactive election is July 6, 2026, or earlier if your statute of limitations closes before then. For 2022 returns filed before April 15, 2023, that window has closed.

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What Costs Qualify?

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The R&D tax credit is limited to the cost of experiments themselves. Qualified research expenditures (QREs) under Section 41 can also include:

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- Employee wages for time spent performing, directly supervising, or directly supporting qualifying research activities.

- Supply costs, including raw material and test components consumed or destroyed during research.

- 65% of amounts paid to contractors performing qualifying research in the U.S.

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For a manufacturer adapting to tariffs, this means the wages of your engineers, machinists, and process technicians who are working on development projects, the cost of prototype materials and test components, and qualifying contract work may qualify toward your credit claim.

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Documentation

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The R&D tax credit is not automatic. The IRS requires records to support R&D tax credit claims. For manufacturing R&D, that means:

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- Documenting the technical problem you were trying to solve. That includes the business reason and the specific engineering or process uncertainty.

- Tracking which employees worked on qualifying activities, and how long.

- Keeping records of what was tested, what results were, and how the outcomes informed next steps.

- Keeping records of qualifying research costs.

- Retaining supply and material records tied to development work.

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Starting documentation now, even informally, is better than trying to reconstruct it later. Documentation doesn’t need to be overly scientific, but proactively keeping notes is always beneficial.