Lean Manufacturing R&D Tax Credit Benefits for Businesses

Lean Manufacturing and the R&S Tax Credit

Small businesses in the Lean Manufacturing sector can significantly benefit from the R&D Tax Credit by reducing their tax liability for qualified innovation, such as process improvements, automation, or waste reduction. Even startups with little to no income can leverage the R&D tax credit payroll offset, which allows them to apply up to $250,000 annually against payroll taxes, helping to offset labor costs while funding further innovation. This incentive supports cash flow, allowing lean manufacturers to reinvest in R&D, hire skilled workers, and improve efficiency—key drivers for growth in competitive markets.

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Founded in 1984 by J.W. Norris as Reed & Co., Swanson Reed has grown to become one of the world’s largest specialist R&D tax credit advisory firms. We boast numerous publications. Our AI software, TaxTrex, is a state-of-the-art AI language model capable of preparing R&D tax credit claims in just 90 minutes. Our R&D audit insurance policy, creditARMOR, is one of the most cost-effective audit management products on the market.

If you have questions or need further assistance, call or email our CEO, Damian Smyth, at (000) 000-0000. Feel free to book a short conference call with one of our national R&D tax credit specialists at a time convenient for you.

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Lean Manufacturing Case Study

Business Scenario

This case study demonstrates the application of key legislative requirements for qualifying R&D activities, applied to relevant projects supporting lean manufacturing.

Timmy’s Candies, Inc., founded in Georgia in the 1980s, is a leading U.S. candy manufacturer specializing in the creation of American artisanal confectionery.

Since its inception, Timmy’s Candies has matured with research and development (R&D) at the core of its operations. Specifically, it developed a custom software system that improves its business by making it more efficient and cost-effective.

Timmy’s Candies incurred qualified research expenses related to the development of its software in 2013. To qualify for the R&D Tax Credit, Timmy’s Candies had to determine the eligibility of its proposed R&D activities. “Qualified research” must meet four main criteria, known as the Four-Part Test. Timmy’s Candies’ qualified research activities included the following.

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Eligible R&D Activities of Timmy’s Candies

The main objective of this R&D project was to create an innovative software system to support product development and lean manufacturing. Timmy’s Candies developed a system that contains its product components in modular steps, so its staff can choose every ingredient, shape, and design to create a finished product on a virtual platform without using real ingredients or equipment.

This system allowed Timmy’s Candies to discover in advance if a product would fail, thereby significantly increasing work efficiency and reducing waste and costs. The specific technical objectives of this project are listed below.

Design and development of a series of prototypes to achieve technical objectives (design and development of a custom software system).

Timmy’s Candies’ hypothesis for this activity questioned whether it was possible to design and develop a software system to improve the efficiency of their daily business operations.

The experimental activities conducted in the design phase predominantly involved computer modeling, conceptual drawings, and mathematical calculations. These experiments could only be proven effective or ineffective during the prototype development and testing phase. Following experiments in that phase, during which the software system was built and tested in various applications, the design was modified and re-tested until the desired result was achieved.

Testing and data analysis to achieve reproducible results to a satisfactory standard (software development and testing).

The hypothesis for this activity stated that the ability to create their products in a virtual environment before testing and producing them in the factory would significantly increase labor efficiency, decreasing waste, labor time, and costs.

The details of this experiment included the development of virtual product components based on information obtained through the model and testing of the virtual components to ensure their efficiency and accuracy.

Background research to evaluate current knowledge gaps and determine feasibility (background research necessary for custom software development).

Before 2013, there was no system that allowed Timmy’s Candies to create its products in a virtual environment. Therefore, in addition to the lack of comparable available solutions, the results of these research activities could not be known or determined in advance due to a series of specific technical challenges.

Timmy’s Candies’ eligible R&D activities during this phase included:

Literature research and review, including maintaining up-to-date knowledge of relevant food safety standards and requirements.
Preliminary review of equipment and resources regarding capacity, performance, and suitability for the project.

The background research conducted by Timmy’s Candies was directly related to the main objective of designing the custom software, thus qualifying as R&D.

Continuous analysis of user feedback to improve prototype design (R&D on custom software feedback).

Timmy’s Candies’ eligible R&D activities for this phase of its project included:

Continuous analysis and testing to improve software efficiency and accuracy.
Ongoing development and modifications to interpret experimental results and draw conclusions that served as a starting point for developing new hypotheses.
Commercial analysis and functionality review.

These activities were necessary to evaluate the performance capabilities of the new system and to improve any defects in the design, thus qualifying as R&D.

Live Webinar: The R&D Tax Credit in the Lean Manufacturing, Logistics and Supply Chain Sector

Duration: 60 Minutes

Learning objectives include:

An overview of R&D Tax Credits
Identifying Qualifying Research Activities
Defining the 4-Part Test
How to substantiate activities through documentation
Identifying Qualifying Research Expenses

Cost: FREE

Knowledge Level: Basic*

R&D Tax Credit Training for the Lean Manufacturing Sector

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Definition of Qualified Research

Qualified research consists of research activities aimed at developing new or improved business components. A business component is defined as any product, process, technique, invention, formula, or software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.

The Four-Part Test

Activities eligible for the R&D Credit are described in the “Four-Part Test,” which must be met for the activity to qualify as R&D.

1. Permitted Purpose: The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component.

2. Elimination of Uncertainty: The taxpayer must intend to discover information that would eliminate uncertainty regarding the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, the method of development or improvement, or the appropriateness of the business component’s design.

3. Process of Experimentation: The taxpayer must undertake a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or method to achieve that result, or the appropriate design of that result, is uncertain at the beginning of the taxpayer’s research activities.

4. Technological in Nature: The process of experimentation used to discover information must be fundamentally based on the principles of hard sciences such as physical or biological sciences, chemistry, engineering, or computer science.

What specific records and documentation did Timmy’s Candies keep?

Similar to any tax credit or deduction, Timmy’s Candies had to keep business records outlining what it did in its R&D activities, including experimental activities and documents to demonstrate that the work proceeded systematically. Timmy’s Candies maintained the following documentation:

Project records/lab notes
Innovation log
Conceptual sketches
Design drawings
Literature review
Background research
Change logs and bug fixes
Test protocols
Test/trial analysis record results
Resource allocation/usage logs
Staff timesheets
Tax invoices
Receipts

Having these documents on file, Timmy’s Candies confirmed it was “compliance ready” — meaning if it were audited, it could present documentation showing the progression of its R&D work, ultimately proving its eligibility for the R&D credit.