<img height="1" width="1" style="display:none;" alt="" src="https://px.ads.linkedin.com/collect/?pid=2031626&amp;fmt=gif">

Custom Manufacturing Sales Activities That Qualify for the R&D Tax Credit

May 8, 2018

sales process R&D Tax CreditWhen conducting a Research and Development (R&D) Tax Credit assessment, some of the most often overlooked aspects of custom manufacturing are the time, effort, and cost to acquire and retain clients. After all, who considers sales activities part of research and development? Actually, this law does — for certain activities. It takes research and development to create new manufacturing processes or products for new clients, and even to modify and improve them for current clientele. So a thorough review could identify huge tax savings.  

How do you determine what qualifies as R&D? That requires understanding the law, your industry, and even the specific products and processes involved. Here are the four key points to consider when reviewing your sales activities.

Considerations When Reviewing Qualifying Sales Activities

  • The same criteria applies to both customers and prospects related to time spent developing or improving a product or process.
  • It doesn’t matter whether you win the business or not. This law applies to the research and development, not the delivery.
  • Sales related activities are not limited to “sales people.” Sales activities may also involve the owner, general manager, sales management, sales engineers, quoting team, engineering, design team, and shop floor manufacturing support (for both tool and fixture design).
  • Qualifying activities must follow the guidelines of the credit’s Four Part Test (permitted purpose, technical uncertainty, process of experimentation and technical in nature).

8 Examples of What Does and Doesn’t Qualify for the R&D Tax Credit

Those are the guidelines, but what about their applications? Here are eight common sales activities, four that qualify for the credit, and four that do not.


Understanding general requirements of the project.  This involves time spent in meetings, phone discussions and email exchanges related to gaining a sound understanding the general requirements (fit, form, function) of this project. Remember, if a current client wants to discuss changing the materials in part of an existing product, or adding new sizes, this still qualifies — even if they decide not to go forward with the changes.

Doesn’t Qualify:

Relationship building.


Evaluating technical specifications. This includes activities related to developing, researching, reviewing, evaluating, or improving/modifying materials and designs  (like manufacturers recommendations, alternative quotes, and ECNs).

Doesn’t Qualify:

Developing advertising campaigns.


Approving technical specifications. This would involve the review and sign-off on drawings, schematics, and other technical specifications.

Doesn’t Qualify:

Planning a trade show or staffing the booth.


Quoting. This involves evaluating the manufacturing processes to produce a product to the documented specifications. Be sure to include equipment, tools, molds, processes and workflow.

Again, whether or not you get the business, the time you spent quoting a project can qualify for the R&D Tax Credit.

Doesn’t Qualify:

Updating existing production quotes for material cost.

Calculating the Qualified R&D Expense

Once you’ve identified your qualified sales activities, the real fun begins — calculating their cost (and your potential tax savings).

  • Use the hourly rate for each employee, based on their annual salary as reported in box 1 on the W-2.
  • Multiply by the number of hours per year spent on the qualified sales-related activities.
  • Add those totals for each employee involved in qualified sales-related activities to calculate the total qualified expense.

Remember, the R&D Tax Credit was created to encourage the development of new products, which can be manufactured for new or existing clients. Don’t miss out on the opportunity to recapture your qualified expenses by failing to identify them.

Find out How Big Your Credit Could Be