This study comprehensively analyzes the United States federal and North Carolina state Research and Development (R&D) tax credit frameworks, specifically contextualized for the unique economic and industrial landscape of Fayetteville, North Carolina. It details five regional industry case studies, their historical economic drivers, strict statutory requirements, recent judicial precedents, and the transformative compliance impacts of the federal One Big Beautiful Bill Act (OBBBA) alongside the proposed North Carolina Breakthrough Act.

Introduction to the Economic Landscape of Fayetteville, North Carolina

Fayetteville, North Carolina, located in the Sandhills region along the Cape Fear River, serves as the economic epicenter of Cumberland County. Historically, the region’s development was rooted in agriculture and early transportation, serving as a vital inland port following its settlement by Scottish immigrants in 1739 and its subsequent incorporation in 1783. Throughout the 19th and early 20th centuries, the local economy relied heavily on textiles, turpentine manufacturing, and regional trade. However, the establishment of Camp Bragg in 1918—an artillery training ground that would eventually become Fort Liberty—permanently altered the trajectory of the region.

Today, Fort Liberty is the largest military installation by population in the world, serving as the headquarters for the U.S. Army Special Operations Command, the 18th Airborne Corps, and the 82nd Airborne Division. Pumping approximately $8.3 billion annually into the regional economy, the installation provides a massive, recession-resistant economic baseline. More importantly for industrial development, Fort Liberty acts as a talent incubator. Approximately 7,000 highly disciplined, technically skilled service members transition into the civilian workforce annually, providing a deep labor pool possessing advanced competencies in engineering, logistics, cybersecurity, and applied sciences.

Leveraging this workforce, alongside robust utility infrastructure provided by Fayetteville PWC and strategic access to the Interstate 95 logistics corridor, Fayetteville has cultivated a highly diversified industrial base. Over the past decade, the region has seen per-capita GDP growth of 21.2%, with a remarkable 30% GDP expansion over a recent three-year period. This growth is propelled by advanced manufacturing, aerospace, healthcare, specialized food processing, and defense technology. As these enterprises engage in increasingly complex engineering and scientific endeavors, they become prime candidates for lucrative federal and state Research and Development (R&D) tax credits. Maximizing these incentives requires a rigorous understanding of the Internal Revenue Code (IRC), emerging case law, and shifting state-level legislative paradigms.

Industry Case Studies and R&D Tax Credit Application in Fayetteville

To illustrate the practical application of R&D tax incentives within the region, the following five case studies examine the unique historical development of major industry sectors in Fayetteville and analyze how their specific operations map onto federal and state statutory frameworks.

Case Study 1: Aerospace and Advanced Metallurgical Manufacturing

Historical Development and Economic Drivers: North Carolina’s legacy in aerospace traces back to the Wright Brothers, but modern development is driven by a concentrated supply chain and military proximity. In 2024, the aerospace sector in Fayetteville received a historic influx of capital when American Titanium Metal, LLC (operating under the designation “Project Aero”) selected Cumberland County for a new $867.8 million manufacturing facility. The company is constructing an expansive 500,000-square-foot campus on 120 acres near Bethune Drive to domestically melt, roll, and finish aerospace-grade titanium. This facility addresses a critical vulnerability in the United States defense industrial base by reshoring the supply of titanium alloys essential for military and commercial aircraft. Fayetteville was selected due to a combination of municipal incentives—including $1.3 billion in approved bond financing through the Cumberland County Industrial Facility and Pollution Control Financing Authority—and the availability of specialized workers transitioning from Fort Liberty.

R&D Tax Credit Eligibility Analysis:

The construction and operationalization of a greenfield metallurgical facility involve immense process engineering and structural design.

• Federal Application: Under IRC Section 41, the engineering schematics and facility designs constitute a “new process” or “technique.” Based on the precedent established in Harper v. United States, the Tax Court validated that design-build construction and architectural engineering qualify as eligible business components. The engineers designing the titanium melting furnaces face profound technological uncertainty regarding thermal dynamics, load-bearing tolerances, and alloy corrosion resistance. The process of experimentation involves complex thermodynamic modeling, stress testing, and metallurgical simulations. The wages of the mechanical, structural, and industrial engineers designing these systems are fully qualifiable as in-house research expenses. Furthermore, once operational, the testing of new titanium alloy combinations will trigger ongoing R&D credit eligibility as experimental supplies are consumed during prototype casting.
• State Application: If the North Carolina Breakthrough Act (Senate Bill 354) is enacted, American Titanium Metal’s massive investment scale would likely push their localized R&D expenditures into the highest proposed general research tier (3.25% for expenses over $200 million). Additionally, with projected average salaries of $123,476, the company effortlessly exceeds the stringent wage standards required by the proposed state legislation to unlock the credit.

Case Study 2: Polymer Engineering and Automated Tire Manufacturing

Historical Development and Economic Drivers: Manufacturing represents a foundational pillar of Cumberland County’s economy. The Goodyear Tire & Rubber Company has operated its sprawling Fayetteville plant since 1969. The location was chosen strategically due to its proximity to the I-95 corridor, enabling rapid distribution across the Eastern Seaboard. While the plant historically faced profitability challenges, a major operational shift occurred in 2010. Implementing rigorous “lean manufacturing” methodologies and advanced process engineering, the plant scaled its production to over 38,000 tires daily, achieving high efficiency while employing approximately 2,500 local workers.

R&D Tax Credit Eligibility Analysis: While the routine mass production of standard tires is explicitly excluded from the R&D credit under the “commercial production” exclusion of Section 41(d)(4), the continuous improvement of the manufacturing process and the development of new materials highly qualify.

• Federal Application: When Goodyear chemists in Fayetteville test new synthetic rubber polymers or sulfur compounds to improve tread life, wet-grip performance, or rolling resistance, they are creating an improved business component. These development cycles involve systematic trial and error in polymer science, firmly satisfying the technological in nature requirement. Moreover, industrial engineering efforts to automate curing lines, reduce cycle times, or decrease energy consumption qualify as process R&D. The wages of the process engineers, testing technicians, and the raw materials (supplies) consumed in experimental prototype batches—before those tires are approved for commercial release—are eligible Qualified Research Expenses (QREs).
• State Application: Older manufacturing facilities often face environmental and safety scrutiny. To claim the North Carolina R&D credit under the proposed SB 354, Goodyear would need to ensure meticulous compliance with the North Carolina Department of Environmental Quality (DEQ) and maintain a clean Occupational Safety and Health Act (OSHA) record, as the new state legislation uses flawless compliance as a strict gatekeeper for tax incentives.

Case Study 3: Clinical Research and Regional Healthcare Systems

Historical Development and Economic Drivers: Driven by a large population of active-duty military personnel, veterans, and civilian dependents, the demand for complex healthcare in Fayetteville is immense. Cape Fear Valley Health System (CFVH) has expanded rapidly from a community hospital into a 950-bed regional healthcare network, employing over 7,000 individuals. Recognizing the need to attract specialized talent and elevate the standard of care, CFVH is actively transitioning into an academic and clinical research hub. This evolution is marked by the 2024 groundbreaking of the Methodist University Cape Fear Valley Health School of Medicine and a strategic partnership with Javara, a clinical research organization, to deliver advanced clinical trials directly to point-of-care facilities in Cumberland County.

R&D Tax Credit Eligibility Analysis:

The intersection of patient care and experimental pharmacology presents significant R&D tax credit opportunities.

• Federal Application: CFVH’s recent launch of oncology trials—specifically focusing on immunotherapies for triple-negative breast cancer—represents textbook qualified research. Clinical trials (Phases I through III) inherently rely on biological sciences, easily satisfying the technological in nature test. The technological uncertainty revolves around the drug’s efficacy, optimal dosing, and adverse patient reactions. The administration of the trial and subsequent data analysis constitutes the process of experimentation. Under Section 41, the W-2 wages of principal investigators, specialized oncology nurses, and clinical data coordinators directly engaged in administering or supervising these trials are eligible QREs.
• State Application: The proposed NC Breakthrough Act includes a highly lucrative 20% credit tier for “North Carolina university research expenses”. Because CFVH is partnered with Methodist University for its medical school, any basic or applied research specifically contracted out to the university’s academic faculty could capture this maximum state incentive rate.

Case Study 4: Agricultural Sciences and Advanced Food Processing

Historical Development and Economic Drivers: North Carolina’s historical economic bedrock is agriculture. The state remains a dominant national force in the production of sweet potatoes, dry beans, poultry, and swine. In Fayetteville and Cumberland County, agriculture has evolved from simple farming into advanced agribusiness and specialized food processing. Companies leverage the region’s extensive agricultural supply chain alongside modern industrial facilities. For instance, joint ventures like Clear Path Recycling process hundreds of millions of PET plastic bottles to create food-grade plastics and materials, bridging the gap between agriculture, packaging, and advanced recycling.

R&D Tax Credit Eligibility Analysis: The agribusiness sector historically underutilizes the R&D tax credit, falsely assuming it applies solely to software and pharmaceuticals.

• Federal Application: The recent landmark Tax Court ruling in George v. Commissioner (2026) unequivocally affirmed that agricultural operations can claim the credit. If a Cumberland County poultry or swine producer engages in systematic trials to test new feed additives, alternative vaccination methods, or disease mitigation protocols (e.g., transitioning to antibiotic-free flocks), these activities qualify as discovering information that is technological in nature (biology and agronomy). Crucially, the court validated the “pilot model” concept for agriculture: the livestock themselves, along with the experimental feed consumed during the trial, can be claimed as supply QREs. However, agribusinesses must implement rigorous, contemporaneous scientific data logging, as the George court disallowed claims that relied merely on retrospective estimates.
• State Application: For state tax purposes, agribusinesses must navigate the strict tier definitions of the pending NC Breakthrough Act. If agricultural research occurs in designated “agrarian growth zones” or Tier 1/Tier 2 economically distressed counties surrounding Fayetteville, businesses may face specialized wage standard calculations to qualify for the 3.25% small business rate.

Case Study 5: Defense-Oriented IT, Cybersecurity, and Logistics Software

Historical Development and Economic Drivers: Fayetteville’s identity is inextricably linked to national defense, earning it the moniker “Pentagon South”. The presence of Fort Liberty, which oversees massive procurement budgets, has spawned a sprawling ecosystem of defense contractors. Eight of the top ten American defense contractors, including Lockheed Martin, Boeing, Northrop Grumman, General Dynamics, and Booz Allen Hamilton, maintain significant operational footprints in the area. Concurrently, the region’s geographical advantages have attracted mega-logistics hubs, such as a 1.3-million-square-foot Amazon fulfillment center. Operating at the nexus of military readiness and massive supply chain logistics requires constant innovation in software, cybersecurity, and data architecture.

R&D Tax Credit Eligibility Analysis: Developing bespoke algorithms for secure military communications or automated logistics routing represents a core pillar of modern R&D.

• Federal Application: Under the OBBBA, software development is explicitly preserved and protected as a qualified R&E activity. When defense contractors engineer code to bridge legacy military databases with secure cloud environments, they face deep uncertainty regarding cryptographic latency, interoperability, and architecture. If the software is developed strictly for the contractor’s own use (Internal-Use Software), it must pass an elevated standard known as the “High Threshold of Innovation” test, demonstrating significant economic risk and lack of commercial availability.
• The Funded Research Exclusion: Defense contractors must strictly analyze their contracts based on case law such as System Technologies, Inc. and Perficient. If the Department of Defense pays a contractor on a “time and materials” basis, the IRS categorizes it as “funded research” (excluded from the credit) because the contractor bears no financial risk. To claim the credit, contractors must operate under firm fixed-price contracts where payment is strictly contingent upon delivering a successful, functional technology, thereby proving they retained the economic risk of experimentation.
• State Application: Because software engineering roles command high compensation, defense IT firms in Fayetteville would easily satisfy the wage and health insurance mandates required by the proposed NC Breakthrough Act, positioning them to seamlessly capture state-level credits upon legislative enactment.

United States Federal R&D Tax Credit Requirements and Administration

The federal government utilizes the tax code to subsidize the financial risk assumed by companies pursuing technological advancements. This incentive is primarily governed by IRC Section 41, which dictates the calculation of the credit, and IRC Section 174 (and the newly minted 174A), which dictates the accounting treatment of the underlying expenditures.

Mechanics of IRC Section 41

The federal R&D tax credit is an incremental, dollar-for-dollar reduction in a company’s federal income tax liability (or payroll tax liability for qualified startups). The credit is generally calculated as 20% of a taxpayer’s Qualified Research Expenses (QREs) that exceed a historically determined “base amount”.

Qualified Research Expenses (QREs) are strictly limited to three categories:

• Wages: W-2 taxable wages paid to employees for time spent engaging in, directly supervising, or directly supporting qualified research.
• Supplies: Tangible personal property consumed or destroyed during the experimental process. This explicitly excludes land, land improvements, and depreciable capital equipment.
• Contract Research: 65% of amounts paid to third-party, U.S.-based contractors to perform qualified research on the taxpayer’s behalf, provided the taxpayer retains substantial rights to the research and bears the economic risk of failure.

The Payroll Tax Offset: For “qualified small businesses”—defined as entities with less than $5 million in gross receipts for the current tax year and no gross receipts dating back more than five years—Section 41 allows the credit to offset up to $500,000 annually against the employer portion of payroll taxes. This provides immediate, critical cash flow to pre-revenue startups in the aerospace, life sciences, and tech sectors operating in Fayetteville.

The Four-Part Test for Qualified Research

To be eligible for the credit, every project or business component must independently satisfy the IRS’s rigorous four-part test:

Statutory Exclusions

Even if an activity passes the four-part test, it may still be disqualified if it falls into an exclusion defined in Section 41(d)(4). Key exclusions relevant to Fayetteville industries include:

• Research after Commercial Production: Once a product or process is ready for commercial sale or use, subsequent debugging or troubleshooting does not qualify.
• Funded Research: As analyzed in the defense contractor case study, research funded by another entity (e.g., government grants or time-and-materials contracts) is excluded.
• Foreign Research: Activities conducted outside the United States do not qualify for the Section 41 credit.
• Routine Data Collection and Quality Control: Standardized testing for production metrics or efficiency surveys does not constitute experimentation.

Legislative Paradigm Shift: TCJA to the OBBBA (Section 174 vs. 174A)

The interaction between the Section 41 credit and the deductibility of research costs has been highly volatile.

Under the Tax Cuts and Jobs Act (TCJA) of 2017, starting in tax year 2022, businesses were stripped of the ability to immediately deduct their specified research or experimental (SRE) expenses under IRC Section 174. Instead, they were mandated to capitalize and amortize domestic R&E costs over five years (and foreign R&E over fifteen years). This created massive artificial tax liabilities for innovation-heavy firms.

This punitive regime was reversed with the enactment of the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21) on July 4, 2025. The OBBBA created a new statutory provision, IRC Section 174A, which permanently restores the right of taxpayers to immediately expense 100% of their domestic R&E costs in the year they are paid or incurred, effective for tax years beginning after December 31, 2024. Alternatively, taxpayers may voluntarily elect to amortize these costs over a minimum of 60 months. Critically, the 15-year capitalization requirement for foreign R&E was retained, creating a massive tax divergence designed to incentivize the onshoring of R&D operations to locations like Fayetteville.

IRS Revenue Procedure 2025-28 and Transition Rules: In August 2025, the IRS issued Rev. Proc. 2025-28 to dictate how businesses transition back to immediate expensing.

• Small Business Relief: “Certain small businesses” (defined as having average annual gross receipts under $31 million) are granted a highly valuable retroactive election. They may file amended returns or administrative adjustment requests (AARs) to retroactively expense unamortized R&E costs generated during the 2022-2024 TCJA window. The deadline for this retroactive election is generally July 6, 2026.
• General Taxpayers: Larger businesses cannot amend prior returns. Instead, they are permitted an accounting method change to accelerate the deduction of their remaining unamortized 2022-2024 pool either entirely in 2025, or split 50/50 across 2025 and 2026.

Heightened Compliance and Form 6765 Redesign

The IRS has dramatically elevated substantiation standards to combat fraudulent claims. Beginning comprehensively in tax year 2026, the IRS is mandating the completion of a new Section G on Form 6765. This section requires granular, qualitative data reporting. Taxpayers must meticulously identify every individual business component, isolate the specific W-2 wages and supplies assigned to that component, articulate the technological uncertainty faced, and summarize the exact process of experimentation used to resolve it. Failure to supply this real-time qualitative nexus will result in claim rejection.

Landmark Federal R&D Tax Credit Case Law

The interpretation of the four-part test and substantiation standards is continuously shaped by the U.S. Tax Court. Recent rulings provide critical guidance for practitioners in Fayetteville:

• George v. Commissioner (T.C. Memo. 2026-10): This is a watershed ruling for the agricultural and biological sectors. A massive vertically integrated poultry producer claimed credits for trials involving feed additives, vaccines, and genetic breeding. The IRS attempted to dismiss the work as “routine farming.” The Tax Court emphatically disagreed, confirming that agriculture is scientifically sophisticated and perfectly eligible for Section 41. Furthermore, the court validated the “pilot model” doctrine in a biological context, ruling that the cost of the experimental chickens and the feed they consumed qualified as supply QREs. However, the taxpayer ultimately lost a significant portion of their claim due to poor documentation; the court found that retrospective R&D studies generated by consultants contradicted the actual daily farm logs recorded by employees. The precedent is clear: biological research qualifies, but only if supported by unimpeachable, contemporaneous scientific logging.
• Little Sandy Coal Co. v. Commissioner (7th Cir. 2023): This appellate decision scrutinized the “substantially all” requirement within the process of experimentation test. The court clarified that when determining if 80% of a project’s activities involve experimentation, the hours spent on direct support and direct supervision must be included in both the numerator and the denominator. Additionally, the court ruled that merely building a prototype (in this case, an entire dry dock vessel) is insufficient. To qualify, the prototype must actively be utilized to test hypotheses and evaluate alternatives using the scientific method; standard quality control checks, such as a deadweight displacement survey, do not equate to experimentation.
• Harper v. United States (2023): Providing massive relief for architectural and construction engineering firms, the Tax Court rejected an IRS motion for summary judgment that attempted to disqualify a construction firm’s structural designs. The court affirmed that customized design-build drawings and structural schematics constitute a valid “new or improved business component” under the law.
• Smith v. Commissioner & System Technologies, Inc. (2025/2022): These cases deal heavily with the “funded research” exclusion. The IRS routinely attempts to disqualify defense and architectural contractors by claiming their clients fund the research. In Smith, an architectural firm was challenged, but the court ruled that because the firm operated under fixed-price contracts and maintained copyright over its designs, it retained substantial rights and bore the financial risk of the engineering failing. This reinforces the necessity for Fayetteville defense contractors to negotiate strict fixed-price, milestone-based contracts rather than time-and-materials billing.
• Siemer Milling Co. v. Commissioner (2019): A stark warning case where an agricultural processor lost hundreds of thousands of dollars in credits because their documentation was deemed insufficient to prove a rigorous process of experimentation, highlighting that generalized estimates without technical nexus will not survive audit.

North Carolina State R&D Tax Credit Legislation and Guidance

While the federal incentive landscape has been solidified by the OBBBA, the North Carolina state framework is highly dynamic.

Historical Context and Current Conformity Gap

North Carolina previously incentivized research through Article 3F of the state tax code, which provided varying credit percentages based on business size and university collaboration. However, this credit sunsetted and expired on December 31, 2015.

Consequently, for the 2024 and 2025 tax years, North Carolina does not offer an active state-level R&D tax credit. More pressingly, taxpayers face a severe “conformity gap” regarding the treatment of R&E expenses. The North Carolina Department of Revenue (NCDOR) currently conforms to the federal Internal Revenue Code exactly as it existed on January 1, 2023. Because the North Carolina General Assembly has not yet passed “rolling conformity” legislation to adopt the 2025 federal OBBBA changes, the immediate expensing provisions of federal Section 174A are not recognized for state tax purposes. When filing 2025 North Carolina corporate income tax returns, taxpayers are currently forced to add back the fully deducted federal R&E expenses and continue amortizing them over five years, creating a heavy administrative tracking burden. NCDOR advises taxpayers to either file an extension while awaiting state legislative action or file using the recalculated, non-conforming federal taxable income.

The Proposed NC Breakthrough Act (Senate Bill 354)

To restore its competitive edge in recruiting advanced manufacturing and biotechnology firms, the North Carolina General Assembly introduced Senate Bill 354—the “NC Breakthrough Act”—in March 2025. If enacted, SB 354 will reenact and modify Article 3F, extending its lifespan to January 1, 2040.

The proposed legislation defines “qualified research expenses” by pointing directly to the federal definitions under IRC Section 41, but it layers on highly complex socioeconomic tiers and rigorous compliance gating mechanisms.

Proposed Tiered Credit Rates: The state credit would operate on a volume-based scale, heavily prioritizing academic collaboration and ecological initiatives:

Note: The credit would be subject to a strict cap, allowing it to offset a maximum of 15% of a taxpayer’s franchise or corporate income tax liability (reduced from a historical 50% cap), with unused credits carrying forward for 15 years.

Stringent Eligibility Gatekeepers: Unlike the federal credit, which relies primarily on technical definitions, the NC Breakthrough Act introduces aggressive corporate citizenship requirements. To be eligible to claim the credit, a business in North Carolina must meet all of the following:

• Wage Standards: Depending on the economic tier of the county (e.g., Tier 1 vs. Tier 3) or designation as an urban progress zone, the company must pay an average weekly wage that meets or exceeds specific regional thresholds (often 90% to 100% of the county average).
• Health Insurance: The business must provide health insurance for its full-time employees.
• Environmental and Safety Compliance: The taxpayer must maintain a clean record, possessing no recent serious violations under the Department of Environmental Quality (DEQ) or the Occupational Safety and Health Act (OSHA).
• Tax Standing: The taxpayer cannot have any unresolved or outstanding state tax debts at the time of claiming the credit or carrying it forward.

Final Thoughts and Strategic Directives

The city of Fayetteville, North Carolina, has transcended its historical identity as a singular military hub to emerge as a highly diversified nexus of aerospace, advanced manufacturing, healthcare, and IT infrastructure. The federal legislative restoration of immediate R&E expensing under the OBBBA’s Section 174A provides a vital liquidity injection for these regional enterprises, allowing them to rapidly reinvest capital into domestic innovation rather than sinking it into artificial five-year amortization schedules.

However, capitalizing on these incentives requires meticulous precision. The IRS, bolstered by case law precedents such as George and Little Sandy Coal, demands exhaustive, contemporaneous documentation. Taxpayers must implement robust tracking systems to definitively link W-2 wages, experimental supply costs, and contractor invoices directly to the technological uncertainties of specific business components. The looming enforcement of Form 6765’s Section G guarantees that unsubstantiated, retrospective R&D studies will face systematic denial.

Simultaneously, financial controllers operating in Fayetteville must navigate the volatile state landscape. They must meticulously manage the current conformity gap between NCDOR and the IRS regarding R&E capitalization while strategically positioning their human resources and environmental compliance protocols to capitalize on the proposed NC Breakthrough Act. By aggressively aligning their operations with both the federal four-part test and the stringent socioeconomic gates of state law, Fayetteville’s industries can systematically de-risk their experimental endeavors and cement the region’s status as a premier hub for American technological advancement.

The information in this study is current as of the date of publication, and is provided for information purposes only. Although we do our absolute best in our attempts to avoid errors, we cannot guarantee that errors are not present in this study. Please contact a Swanson Reed member of staff, or seek independent legal advice to further understand how this information applies to your circumstances.