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For companies that manufacture products at scale, or in small orders, supplies and materials costs can have a significant impact on the amount of credit that they can generate. In general, there are four (4) different types of supplies that are qualifiable:

Qualified Supplies


Raw Materials

Raw materials utilized to produce prototypes, pilot models, first articles, and/or samples for validation.

Consumable Supplies

Consumable goods utilized in the production and/or validation of prototypes, pilot models, first articles, and/or samples for validation.

Equipment Components

Components and parts used in custom equipment that was designed and developed.

Custom Equipment

Component and raw materials costs associated with a piece of equipment that was designed and developed from the ground up.

There are several requirements when it comes to these supplies. The first is that supply costs on a particular business component can only be qualifiable as long as technical uncertainty still exists in the process. For instance, if I developed Widget A through an iterative design process, then prototyped it multiple times to determine the best fit design for the project requirements. My prototype costs would be qualifiable until the point I finalized the design. After that point, the IRS would consider any additional samples that were created to be non-R&D related.

The second is that any qualified supply cannot be included as a depreciable asset in your depreciation schedule. A qualified piece of custom equipment would need to be reclassed as a Section 174 expense when being included in the R&D tax credit computation. You may need to consult a tax professional about making this change.

However, this development process could restart further down the development path. For instance, using the same example, once I completed the final designs along with the final prototype, I could begin the process of developing a production process to create the widget in a mass production setting. Then, the materials that I utilized to develop and finalize the production process would also qualify as developmental supplies.


As with all qualified expense categories, supplies expenses are attributed to the state in which they were consumed/utilized NOT where they originated.



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