The R&D Tax Credit Aspects of Doing Business in North Carolina

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As the country’s fifth largest manufacturing state, North Carolina is home to the largest manufacturing workforce in the Southeast.  The state’s business-oriented climate and skilled workforce has earned North Carolina a spot as one of the Best States for Manufacturing .   

In the manufacturing sector, research and development (R&D) activities are pivotal to driving growth and efficiency. Federal and state programs offer substantial tax savings aimed at supporting these R&D efforts.

In recent years, North Carolina has experienced tremendous growth in manufacturing which has led to increased tax credit opportunities. This article will focus on the federal R&D Tax Credit and how NC businesses can best utilize the credit.

The Research & Development Tax Credit

Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • Must be technological in nature
  • Must be a component of the taxpayers business
  • Must represent R&D in the experimental sense and generally includes all such costs related to the development or improvement of a product or process
  • Must eliminate uncertainty through a process of experimentation that considers one or more alternatives

Eligible costs include U.S. employee wages, cost of supplies consumed in the R&D process, cost of pre-production testing, U.S. contract research expenses, and certain costs associated with developing a patent.

On December 18, 2015, President Obama signed the PATH Act, making the R&D Tax Credit permanent. Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax for companies with revenue below $50MM, and for the first time, pre-profitable and pre-revenue startup businesses can obtain up to $250,000 per year in payroll taxes and cash rebates.

North Carolina’s Manufacturing Economy

The North Carolina manufacturing industry has been growing since the turn of the century.  Today, the state is home to almost half a million skilled manufacturing workers, representing 10% of the state’s total workforce.  The manufacturing industry is responsible for $104 billion in state revenue.  North Carolina is also ranked the second-largest state for food and beverage manufacturing.

GE established itself in NC as it attempted to be the first company to create jet engine components made from advanced ceramic matrix composite materials.  As the “first in flight” state, aerospace continues to be a large driver of manufacturing.

While large multi-national corporations have put down roots in North Carolina, it is the small to medium-sized businesses that play a vital role in the state’s manufacturing economy. A vast majority (over 80%) of North Carolina manufacturers have fewer than 50 employees and 51% have fewer than 10 employees.

Life Sciences & Biotechnology

The Research Triangle Park (RTP) in Durham, NC is one of the country’s largest clusters of innovation.  In 1960, RTP attracted its first company, Chemstrand,  the inventor of AstroTurf.  Shortly after, IBM came to the area with a 600,000 square foot research facility.  Today, RTP is home to more than 190 companies and over 50,000 people with expertise in various fields including micro-electronics, telecommunications, biotechnology, chemicals, pharmaceuticals, and defense technologies.  The research cluster fosters collaboration with nearby research-intensive universities such as the University of North Carolina and Duke which are crucial to the effort.  Industries invest more than $296 million in R&D at the region’s universities each year – more than double the average R&D investment for major innovation clusters throughout the nation.

Biotechnology is a broad discipline with technology applications spanning from efficient agriculture/farming, pharmaceutical medicines and vaccines  to fossil fuel alternatives.  Outside of Triangle Research Park, there are few (if any) places in the world with such an abundance of pharma and R&D facilities concentrated in one region. With an aging baby boomer population and growing demand for medical advancements, the sector is likely to continue its growth in North Carolina and the surrounding region.

Biological Drugs
Biological drugs are medicinal products manufactured or extracted from a biological source.  After a decade of glooming perspectives, the pharmaceutical industry is making a strategic shift towards biologics.  The North Carolina region is no exception.  A growing number of NC companies are involved in the development of biological drugs, furthering its promise for targeted, effective treatment. For more on biological drugs see “The R&D Tax Credit Aspects of Biological Drugs”.

Nanoscale Technologies
Nanotechnology involves the manipulation of very small particles (about 1/100,00th of the width of a human hair) to create new materials and devices with applications in medicine, electronics, biomaterials, and energy production.  This technology is particularly important in the R&D process for pharmaceuticals.   The Research Triangle Region is home to more than 50 companies that utilize nanotechnology. For more information on nanotechnology see “The R&D Tax Credit Aspects of Nanotechnology".

Food & Beverage

The growing demand within the food and beverage industry is for healthier products with reduced fat and salt content as well as the elimination of preservatives.  In order to remain competitive, food and beverage companies must continuously innovate and improve existing products as well as manufacturing processes. State-of-the-art technology is increasingly utilized within manufacturing facilities to improve efficiencies throughout the process flow. The same holds true for the packaging processes where companies are increasingly integrating automation to maintain throughput.

The food and beverage industry is also faced with increased pressure to meet stringent standards of product quality, nutrition, and safety. Incorporating new formulations with reduced artificial flavors, preservatives, GMOs, etc. requires a constant process of research and experimentation.

Food and beverage companies must also continuously improve their processes to ensure food safety while maintaining efficiency. Major challenges include the recent Food Safety Modernization Act (FSMA) regulations which involve the development, validation, and testing of new processes.

From large food processors to specialty bakeries, our clients are engaged in a continuous process of research and development to expand product offerings, increase the efficiency of operations, and integrate food safety processes. R&D activities are heavily focused on formulation, testing, packaging, software, and process improvement initiatives.

For one of our North Carolina clients in particular, food safety and quality are critical aspects of their operations. The development of procedures for raw ingredient receiving including specification and requirement testing for color, size, etc. plays a key role in maintaining operational efficiency.  The facility features temperature and humidity-controlled storage to meet the requirements of various food items such as nut butters and probiotics as well as improve powder packaging processes. Testing processes include in-house microbial testing, seal integrity testing, pH and BRIX monitoring, metal detection/x-ray, etc.

As the second-largest state for food and beverage manufacturing, North Carolina has excellent opportunities for R&D Tax Credits.


North Carolina’s geographic location midway on the East Coast provides excellent access for distribution and logistics companies, particularly for manufacturing, assembly, e-commerce and retail distribution.

The deepwater ports of Wilmington and Morehead City, along with the North Carolina Transpark, four regional airports, and Foreign Trade Zones 214 & 93 allow companies to conveniently and efficiently ship products from the region directly to critical global markets.  North Carolina’s geographic location has made it more connected to the world than most would imagine.

Transportation and logistics are closely intertwined with distribution, hence the acronym, TLD.  TLD includes warehouse cross-docking, inventory, order management, and now more than ever, software.  


Packaging is a fundamental component of all manufactured products. According to the World Packaging Organization, the global packaging materials and machinery industry generate approximately $500 billion yearly, equal to almost 2% of the gross domestic product in industrialized nations. The packaging industry is an integral part of the world economy. The demand for packaging is expected to reach $1.05 trillion by 2024. This is especially true for a post-pandemic world as consumers are utilizing online shopping more than ever and those goods require efficient packaging. With the drastic increase in shipped goods, there is a significant focus on environmentally friendly packaging and for companies to reduce the amount of packaging they use while ensuring that their products are well protected. 

Over the past decade, the packaging industry has invested tremendously in research and development which has led to new and innovative technologies.  Recent enhancements have significantly expanded the possibilities of packaging across a wide range of products.  From a business perspective, firms are avidly looking to reduce the weight and cost of packaging to stay competitive. Trends in the packaging industry include: advances in digital printing, personalized and specialized e-commerce packaging, and sustainable packaging.

There are numerous technologies that are poised to revolutionize the food packaging sector of the greater packaging industry. Some of these technologies include edible packaging, micro packaging, smart packaging, antimicrobial packaging, water-soluble packaging, and self-cooling and self-eating packaging.

As an example, one of our clients dedicates significant research and experimentation efforts towards meeting today’s packaging industry challenges. This includes designing and developing highly custom machine solutions to complete each job while also maintaining the flexibility and versatility of processes.  The Company’s 2018 and 2019 development efforts were geared towards increasing automation, capacity, and efficiency, while maintaining food safety and GMP/NSF standards.  Our client has a full-service in-house machine shop where the team customizes tooling and machinery for each job.

Firms that operate in the packaging industry engage in research and development activities to integrate new technologies, equipment, and processes into their operations.

Design: Architecture & Engineering

Architecture and engineering firms are typically engaged in R&D activities related to overcoming technical design challenges.  As an example, one of our clients in North Carolina specializes in mechanical, electrical, and plumbing system design for laboratories, hospitality, transportation, technology, utilities, and mission critical facilities. These environments demand very precise air conditions that can only be achieved with state-of-the-art air controls technology.  Industry and government standards are constantly in-flux and are usually becoming more and more demanding.  Accordingly, the solutions are becoming increasingly sophisticated.   
Multi-discipline projects are a complex endeavor. Typical projects involve sustainable designs, process expansion & improvement projects, integration of high technology systems, design and development of laboratories,  design and integration of chiller plants, etc.
For design firms, almost every project entails uncertainty and requires the consideration of alternatives and modeling. A&E firms utilize a myriad of advanced modeling techniques to including Computer-Aided Design (CAD), Revit Building Information Modeling (BIM), in-house modeling tools, Visual, eQUEST, and CHVAC. This sector presents strong opportunities for R&D Tax Credits.


North Carolina’s university system produces 8,500 graduates each year, many of them with specialized training useful in new technology applications.  Of the 901 institutions surveyed by the National Science Foundation, Duke ranked eighth in total R&D expenditures for 2017 (the latest reported year) beating out other research-intensive schools such as Harvard and Stanford.  Also atop the list was UNC-Chapel Hill, placing 11th with $1,102,063 in total R&D expenses.

Three major universities, Duke, NC State,  and The University of North Carolina at Chapel Hill provide the anchor to Research Triangle Park which is home to more than 100 research and development organizations, employing nearly 40,000 people.   

Duke University
Duke is among the world's leading research universities, as measured by research funding, rankings, academic citations and other indicators of impact.  Its faculty experts work with graduate students, undergraduates and others to expand the frontiers of knowledge in diverse fields ranging from the natural sciences to the social sciences.  Duke also works actively to translate discoveries into new products, industries and jobs, and to share insights with legislators and others involved in public policy.   
Many of the exciting innovations at Duke are happening at the School of Medicine where industry partners from Triangle Park collaborate with researchers.  In one study, Duke University researchers have uncovered the genes that are normally activated during recovery from bacterial infection.  The finding could lead to ways to jumpstart the recovery process and possibly fend off autoimmune diseases and chronic inflammatory disorders.


The manufacturing industry in North Carolina is large in both size and scope.  The manufacturing sector is also the number one user of the R&D Tax Credit on a national level.  The industry is primed for R&D credits and there are a number of other R&D credit eligible  industries fueling the North Carolina economy.  

Federal Research and Development Tax Credits are available to support and stimulate North Carolina businesses.

Article Citation List



Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Andrea Albanese is a Manager with R&D Tax Savers.

Preeti Sulibhavi is a CPA and Tax Analyst with R&D Tax

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