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