What Tax Credits and Incentives Are Manufacturers Likely to Miss?

Strategic tax planning can also uncover meaningful opportunities to reduce tax liability and improve cash flow. Yet many manufacturers may be overlooking federal and state tax credits and incentives designed to encourage innovation, energy efficiency, domestic production, and workforce development. This can happen for a variety of reasons.

Some businesses assume their activities do not qualify. Others may be unaware of available programs or concerned that the documentation required to claim an incentive will outweigh the potential benefit. For manufacturers in Minnesota and across the country, taking a closer look at available tax incentives can help identify opportunities that might otherwise be missed.

The Research & Development (R&D) Tax Credit is one of the most significant tax incentives manufacturers may overlook.

A common misconception is that research and development only happen in laboratories or technology companies. Manufacturers may conduct qualifying R&D activities as part of their everyday efforts to improve products and processes.

Depending on the circumstances, potentially qualifying activities may include:

• – Developing new or improved products
• – Designing more efficient manufacturing processes or tooling
• – Prototyping new products or components
• – Testing new materials
• – Experimenting with designs, processes, techniques, or formulas

Manufacturers should not automatically assume an activity is ineligible simply because they consider it part of their normal production or engineering process. Determining whether an activity qualifies requires looking more closely at the nature of the work and the applicable R&D requirements.

Minnesota manufacturers may have an additional opportunity through the Minnesota Research Credit. When applicable, combining federal and state R&D incentives can create meaningful tax savings that businesses may be able to reinvest in equipment, employees, facilities, or future innovation. Additionally, R&D tax credit planning can be an important part of a broader tax strategy.

Manufacturers frequently invest significant amounts of capital into their facilities. Those improvements may be necessary for operations, but certain projects can also create potential tax opportunities.

The Section 179D Energy Efficient Commercial Buildings Deduction is designed to incentivize qualifying energy-efficient commercial building improvements.

Manufacturers that have recently upgraded or renovated a facility should consider whether improvements involving areas such as:

• – Interior lighting systems
• – Heating, ventilation, and air conditioning (HVAC) systems

could potentially qualify.

Eligibility and the amount of the deduction depend on the specific project and applicable requirements. Certain prevailing wage and apprenticeship requirements may also affect the available deduction.

The important takeaway is that a facility improvement should not necessarily be viewed only as a capital expenditure. When manufacturers make substantial building improvements, tax implications should be considered as part of the planning process rather than after the project is complete.

Manufacturers involved in the growing clean energy supply chain may have another potential opportunity through the Section 45X Advanced Manufacturing Production Credit.

Section 45X provides a production-based incentive for domestic manufacturers of certain eligible clean energy components, which can include components related to:

• – Solar energy
• – Wind energy
• – Battery storage

Unlike incentives that are primarily based on the amount a business invests or spends, Section 45X generally focuses on the production and sale of eligible components.

For manufacturers that have entered, expanded into, or support the renewable energy supply chain, evaluating potential Section 45X eligibility can be an important part of tax planning.

Because manufacturing operations and product lines evolve, businesses that did not qualify for a particular incentive in the past should not necessarily assume that remains true today.

Tax incentives are not limited to equipment, facilities, or product development. Hiring decisions can also create potential tax benefits.

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers that hire and employ individuals from certain targeted groups that have historically faced barriers to employment.

For manufacturers that regularly hire employees, WOTC eligibility can be worth reviewing as part of the hiring and onboarding process.

One of the challenges with hiring-related tax incentives is timing. If tax considerations are not incorporated into the hiring process, businesses may miss opportunities to gather the information and documentation needed to determine eligibility.

Coordination among HR, payroll, leadership, and the company’s tax advisors can help manufacturers identify potential opportunities earlier.

One of the biggest reasons manufacturers miss tax incentives is simple: they may not realize that what they are already doing could qualify.

A manufacturer may think of designing new tooling as simply solving a production problem. Management may view a facility upgrade as routine maintenance or modernization. Hiring decisions may be handled entirely through HR without considering possible tax incentives.

Documentation can be another barrier. Some businesses assume that identifying and substantiating qualifying activities, particularly for R&D, is too complicated or time-consuming to justify pursuing a credit.

That is why proactive communication is so important.

Instead of waiting until a tax return is being prepared to discuss what happened during the year, manufacturers can benefit from regularly talking with their tax advisors about changes in operations, investments, hiring, product development, facility improvements, and long-term plans.

Manufacturers do not necessarily need to know the name of every tax credit available to them. What matters is having a process for recognizing the business activities that may trigger a tax opportunity.

When meeting with your CPA or tax advisor, consider discussing questions such as:

• – Did we develop or improve any products this year?
• – Did we change or improve a manufacturing process?
• – Did we design new tooling or test new materials?
• – Did we renovate or improve our manufacturing facility?
• – Did we make significant energy-efficiency improvements?
• – Did we enter or expand within the clean energy supply chain?
• – Did we significantly increase hiring?
• – Are we planning any major investments or operational changes in the next year?

These conversations can help shift tax planning from a year-end compliance exercise to an ongoing business strategy.

Tax credits and incentives can have implications beyond a company’s annual tax return.

When manufacturers identify legitimate opportunities to reduce their tax burden, the resulting savings can potentially support other business priorities, including:

• – Purchasing or upgrading equipment
• – Expanding facilities
• – Hiring and developing employees
• – Investing in technology and automation
• – Funding product development and innovation
• – Improving cash flow
• – Preparing for future growth

In an industry where margins, labor costs, supply chains, and capital expenditures can change quickly, understanding potential tax incentives can become part of a manufacturer’s broader financial strategy.

The goal is not simply to claim as many credits as possible. It is to identify the incentives that legitimately apply to the business and ensure they are properly evaluated and documented.

At Froehling Anderson, we understand that every manufacturing business operates differently. A tax strategy that makes sense for one manufacturer may not make sense for another.

Our approach begins with understanding the business itself; how you operate, where you are investing, what you are developing, how your workforce is changing, and where you plan to go next.

From there, our team can help identify areas that warrant a closer look, including potential federal and Minnesota tax credits and incentives. Rather than treating tax planning as a once-a-year conversation, we believe it should be part of an ongoing relationship with your CPA.

For manufacturers searching for accountants in Plymouth and St. Cloud, Minnesota, or experienced tax advisors who understand closely held businesses, the value of that relationship is having someone who can look beyond the numbers on a return and ask questions about what is happening within the business.

Our team of experienced professionals works closely with manufacturers to understand their operations, evaluate potential opportunities, and incorporate tax planning into their larger financial picture.

If you are unsure whether your manufacturing business has taken full advantage of available tax incentives, reviewing your recent and current activities is a good place to start.

Consider the investments, process improvements, product development, facility upgrades, and hiring activity that occurred during 2025 and 2026. Even activities that seem routine may be worth discussing with your tax advisor.

Tax credits and incentives should not be viewed simply as an added bonus. When applicable, they can be valuable tools for improving cash flow, reducing the effective tax burden, and freeing up resources for future investment.

Think your manufacturing business may be overlooking tax opportunities? Connect with Froehling Anderson to discuss your operations and learn whether federal or Minnesota tax credits and incentives may apply to your business.

Disclaimer: This content is for informational purposes only and does not constitute legal, tax, or audit advice. Please consult with your plan advisor or CPA for guidance tailored to your situation.