This study provides a detailed analysis of the United States federal and North Carolina state Research and Development (R&D) tax credit requirements within the specific industrial landscape of Greenville, North Carolina. Through five targeted industry case studies and an exhaustive examination of tax administration guidance, the analysis demonstrates how entities can leverage these statutory frameworks to subsidize technological innovation.

Industrial Case Studies: The Evolution and Taxation of Greenville’s Innovation Ecosystem

Greenville, the county seat of Pitt County and the tenth-largest city in North Carolina, has undergone a profound economic metamorphosis over the last century. Historically recognized throughout the nineteenth and early twentieth centuries as a major export center for tobacco and cotton, the region was characterized by traditional agriculture, with the Tar River serving as a primary navigable waterway for transporting goods. However, as the global economy shifted, Greenville strategically pivoted toward knowledge-based industries, leveraging its central location in eastern North Carolina to serve a regional population of over 815,000 people. The catalyst for this transformation was the establishment of East Carolina University (ECU) and its Brody School of Medicine, which cultivated a highly skilled workforce, alongside the proactive recruitment efforts of the Pitt County Committee of 100. The city now boasts an incredibly diversified economy anchored by advanced manufacturing, pharmaceuticals, life sciences, and engineered materials. To illustrate how the United States federal and North Carolina state R&D tax credit laws apply in practice, the following five case studies detail unique industries that have flourished in Greenville, examining exactly why they developed in the region and how their specific activities generate eligible research expenditures.

Case Study: Pharmaceutical Development and Continuous Manufacturing (Thermo Fisher Scientific and Mayne Pharma)

Why and How the Industry Developed in Greenville: The pharmaceutical manufacturing industry in Greenville traces its origins to 1968, when Burroughs Wellcome—a major pharmaceutical research and manufacturing firm—selected the city for its primary operational home. Greenville was chosen due to its abundant water resources managed by the Greenville Utilities Commission (GUC), concierge permitting processes, and access to a highly trainable workforce transitioning out of the declining textile and tobacco sectors. Over the decades, this initial investment catalyzed a massive agglomeration of life sciences infrastructure. Today, the Greenville Metropolitan Statistical Area (MSA) possesses a pharmaceutical workforce concentration twelve times higher than the national average. This development was accelerated by continuous state and institutional investments, most notably East Carolina University’s Pharmaceutical Development and Manufacturing Center of Excellence (the Eastern Region Pharma Center). Supported by millions of dollars in grants from the Golden LEAF Foundation, ECU partnered with regional community colleges to provide localized Good Manufacturing Practice (cGMP) and Good Laboratory Practice (GLP) training, directly supplying talent to local giants like Thermo Fisher Scientific and Mayne Pharma.

Examples of Eligibility and Technical Application: Thermo Fisher Scientific operates a 1.5 million-square-foot multi-purpose pharmaceutical manufacturing and packaging campus in Greenville, spanning 640 acres and 29 buildings. The company recently executed a $154 million expansion to increase manufacturing capacity for sterile liquid, lyophilized filling, pre-filled syringes, and solid dose continuous manufacturing. Similarly, Mayne Pharma invested $65 million to expand its oral solid dose manufacturing capacity, focusing on highly potent compounds, cytotoxic products, and drugs with poor bioavailability.

Under United States federal tax law, the engineering required to implement a fully functional continuous manufacturing line or to formulate drugs with poor bioavailability presents significant technical uncertainty. The iterative process of testing active pharmaceutical ingredient (API) granulations, optimizing lyophilization (freeze-drying) cycles, and validating aseptic liquid filling parameters relies fundamentally on the principles of chemistry, biology, and engineering. When Thermo Fisher engineers design a new development line for live virus filling, they must engage in a systematic process of experimentation—adjusting temperatures, flow rates, and sterilization protocols—to eliminate uncertainties regarding yield and sterility. The wages paid to these formulation scientists and process engineers, along with the supplies consumed during these validation batches, constitute Qualified Research Expenses (QREs) under Section 41 of the Internal Revenue Code (IRC). From a state perspective, Mayne Pharma operates within Indigreen Corporate Park. By locating this technical development within a designated business park, Mayne Pharma’s experimental activities are eligible for the highly lucrative Eco-Industrial Park R&D tax credit tier under North Carolina’s newly reenacted tax laws, significantly subsidizing their advanced drug-delivery technology developments.

Case Study: Marine Engineering and Hydrodynamic Naval Architecture (Grady-White Boats)

Why and How the Industry Developed in Greenville: Greenville is the historic birthplace and operational headquarters of Grady-White Boats, one of the most respected manufacturers of premium offshore sportfishing vessels in the world. The company was founded in 1959 by Glen Grady and Don White, who established their initial operations in the Old Star Tobacco Warehouse No. 2 on Albemarle Avenue. The marine manufacturing industry took root in Greenville due to the city’s strategic proximity to the North Carolina coast (located just 85 miles from the Atlantic Ocean) and its access to a local artisan workforce skilled in woodworking and upholstery. In 1968, the company was purchased by Eddie Smith, who correctly identified that the future of marine architecture lay not in traditional lap-strake mahogany, but in advanced fiberglass composites. Smith discontinued wooden models, relocated to a 150,000-square-foot facility across town, and partnered with naval architects to pioneer modern hull dynamics.

Examples of Eligibility and Technical Application: The cornerstone of Grady-White’s technical supremacy is the “SeaV2” hull, developed in partnership with C. Raymond Hunt Associates. Traditional deep-vee hulls often sacrifice fuel efficiency and stability at rest in exchange for a soft ride in rough water. To resolve this technical paradox, Grady-White engineered a “continuous variable vee” hull. Unlike any other vessel, the SeaV2 hull has no two places on the keel where the deadrise is the same; it continuously sharpens from 20 degrees at the transom to over 50 degrees at the bow stem.

Designing and perfecting this continuously variable geometry involves intense mathematical modeling, fluid dynamic engineering, and the physical construction of pilot models. The process of engineering a new 45-foot offshore hull requires naval architects to formulate hypotheses regarding water displacement, buoyancy lift, and quartering sea tracking. They then build scale and full-size pilot models to test these variables, iteratively adjusting the chine angles and strakes to optimize performance without sacrificing fuel efficiency. Under federal R&D tax law, this methodology satisfies the four-part test, as it relies on physical sciences (hydrodynamics) to eliminate technical uncertainty regarding structural capability and design, utilizing a strict process of experimentation. The wages of the naval architects, the master mold builders, and the materials consumed in testing the fiberglass resin curing processes are fully eligible for the federal R&D credit, ensuring the continuous evolution of Greenville’s marine manufacturing sector.

Case Study: Advanced Materials Handling and Logistics Equipment (Hyster-Yale)

Why and How the Industry Developed in Greenville: Greenville serves as a primary product development center and global manufacturing hub for Hyster-Yale Materials Handling, Inc. The heavy machinery and materials handling industry gravitated to Greenville in the mid-1970s. In 1974, Eaton Corporation (a predecessor to the modern Yale brand) opened a massive plant in Greenville to produce electric industrial trucks. The region’s appeal was driven by the availability of vast tracts of industrial land, a robust highway network (including the US-264 bypass, now Interstate 587), and heavy utility infrastructure provided by GUC, which allowed for power-intensive manufacturing processes. Over the decades, through acquisitions by the North American Coal Corporation (NACCO) and a subsequent public spin-off in 2012, the Greenville facility evolved into a critical nexus for Hyster-Yale’s global engineering operations.

Examples of Eligibility and Technical Application: Hyster-Yale is currently navigating a massive technological shift toward electric and alternative power solutions to meet the domestic manufacturing requirements of the federal Build America, Buy America (BABA) Act. Engineering a high-capacity electric container handler capable of lifting loaded shipping containers at global ports involves profound technical uncertainty. Engineers must evaluate novel battery chemistries, integrate Nuvera fuel cell technologies, design advanced thermal management systems, and reinforce chassis integrity to handle immense torque vectors.

The iterative testing of these high-capacity electric prototypes involves subjecting the equipment to extreme stress environments, analyzing data on battery depletion rates under heavy loads, and refining the electronic control units. This systematic trial-and-error methodology directly qualifies as a process of experimentation intended to improve the performance and reliability of a business component. Furthermore, Hyster-Yale recently expanded its research footprint by leasing technology and testing space at ECU’s Intersect East (ECRIC), a millennial research campus. By collaborating with ECU faculty and utilizing this designated innovation hub, Hyster-Yale’s R&D expenditures can qualify for both the federal Section 41 credit and the enhanced North Carolina University Research tax credit.

Case Study: Automotive Mechatronics and Electrification (DENSO / ASMO)

Why and How the Industry Developed in Greenville: The automotive systems and component manufacturing industry established a stronghold in Greenville in 1995 when ASMO North America, a subsidiary of Japan-based ASMO Co. Ltd., located its manufacturing operations in the city. ASMO was drawn to Greenville specifically due to the development of Indigreen Corporate Park. Indigreen provided 353 acres of shovel-ready land, Planned Light Industry (PIU) zoning, and immediate access to 12.5 KV electrical distribution and natural gas lines, which are essential for precision mechatronic manufacturing. Additionally, the proximity to specialized engineering programs at East Carolina University ensured a steady pipeline of mechanical and electrical engineers. In 2019, as the automotive industry rapidly accelerated toward electrification and automated driving, ASMO was fully integrated into DENSO’s North American operations to combine small-motor expertise with large-motor innovations.

Examples of Eligibility and Technical Application: DENSO Manufacturing North Carolina (DMNC) focuses on the development and manufacture of high-precision smart motors, windshield wiper systems, electric power steering motors, and pinch sensor assemblies. As automated driving systems require near-instantaneous, fail-safe responses, DENSO engineers must continuously innovate motor reliability and algorithmic precision. For example, developing a novel pinch sensor assembly that can accurately differentiate between normal window resistance (like ice) and a human obstruction requires extensive algorithmic coding and physical stress testing. Developing this firmware and integrating it with proprietary hardware involves resolving technical uncertainty through a highly structured process of experimentation based on computer science and electrical engineering, satisfying the federal four-part test.

Additionally, during the COVID-19 pandemic, DENSO’s Greenville engineers demonstrated extreme manufacturing agility by utilizing their molding and design expertise to produce components for powered air-purifying respirators (PAPR) in under 25 days. Adapting automotive thermal molding processes to create medical-grade respirator components required rapid hypothesis testing and immediate validation of structural integrity. The labor and materials dedicated to this rapid prototyping represent definitive R&D. Furthermore, because DENSO operates within Indigreen Corporate Park, these R&D activities are perfectly situated to capture the North Carolina Eco-Industrial Park tax credit tier, which provides up to a 35% credit on qualified research expenditures, dramatically altering the financial viability of advanced automotive engineering in the state.

Case Study: Advanced Consumer Plastics and Polymer Engineering (Regional Manufacturers)

Why and How the Industry Developed in Greenville: Greenville’s legacy in traditional manufacturing eventually paved the way for advanced plastics, polymers, and consumer goods engineering. As the textile and tobacco industries waned, the region was left with a vast infrastructure of industrial warehouses and a workforce accustomed to assembly and machine operation. To repurpose these assets, the Pitt County Committee of 100 developed numerous industrial parks, including Minges Corporate Park and Worthington Industrial Park. These parks attracted custom plastics manufacturers (such as CMI Plastics) and sustained the long-term operations of major consumer goods corporations like Rubbermaid, which relies heavily on polymer molding. The availability of high-capacity natural gas lines, provided by Greenville Utilities, was a critical factor in attracting these businesses, as plastic thermoforming and injection molding require immense thermal energy.

Examples of Eligibility and Technical Application: The engineering of consumer plastics involves highly sophisticated material science and mechanical engineering. If a Greenville-based manufacturer seeks to develop a new polymer blend incorporating 40% post-consumer recycled (PCR) resin without compromising the tensile strength or UV resistance of the final product, they face immense technical uncertainty. They cannot simply guess the correct formulation; they must engage in a process of experimentation. Engineers must adjust the melt flow index, test various binding agents, and alter the thermodynamics of the injection mold itself. Furthermore, designing the physical steel injection mold—which requires computational fluid dynamics (CFD) modeling to ensure the molten plastic fills the cavity without leaving voids or creating flash—is a pure engineering exercise.

The wages paid to polymer engineers, CAD mold designers, and the raw plastic resin consumed during test runs qualify as Section 174 research and experimental expenditures. At the state level, these regional plastics manufacturers, often qualifying as small-to-medium enterprises, can leverage the North Carolina Base-Tier or Small Business R&D tax credit. If a local plastics firm contracts ECU’s chemistry or engineering departments to conduct advanced spectrographic analysis on their new polymer blends, those contract costs would be eligible for the 20% North Carolina University Research credit.

Detailed Analysis of United States Federal R&D Tax Credit Law

The foundation of innovation subsidization in the United States rests on two primary sections of the Internal Revenue Code: Section 41 (Credit for Increasing Research Activities) and Section 174 (Research and Experimental Expenditures).

The Statutory Four-Part Test (IRC Section 41)

For an activity to generate Qualified Research Expenses (QREs)—which primarily include W-2 wages, supplies consumed in the R&D process, and 65% of contract research expenses—it must strictly satisfy a rigid four-part test established by the IRS. This test is applied at the business component level.

The 2025 One Big Beautiful Bill Act (OBBBA) and Section 174

The legal framework governing the deductibility of R&D expenses experienced a massive upheaval between 2022 and 2025. Originally, under the Tax Cuts and Jobs Act of 2017, taxpayers were forced, starting in tax years beginning after December 31, 2021, to capitalize all Section 174 research and experimental expenditures and amortize them ratably over five years (for domestic research) or fifteen years (for foreign research). This capitalization requirement severely hampered cash flow for highly innovative companies.

However, the enactment of Public Law 119-21, known as the One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, completely restructured this dynamic. The OBBBA added a new IRC Section 174A. Under Section 174A(a), the law permanently reinstated the immediate expensing and deductibility of domestic research and experimental expenditures for tax years beginning after December 31, 2024. Alternatively, under Section 174A(c), taxpayers retained the election to charge such expenditures to a capital account and amortize them over a period of not less than 60 months, providing vital flexibility for companies lacking immediate taxable income.

Crucially, the OBBBA maintained the punitive 15-year amortization requirement for foreign R&E expenditures. This legislative dichotomy creates a massive incentive for global corporations to repatriate their R&D operations to domestic shores, making localized innovation ecosystems like Greenville, North Carolina, immensely attractive for foreign direct investment. Furthermore, Section 70302(f) of the OBBBA provided transition options to allow taxpayers to recover unamortized amounts paid or incurred between 2022 and 2024.

Detailed Analysis of North Carolina State R&D Tax Credit Law

The trajectory of state-level R&D incentives in North Carolina reflects a complex history of expirations, discretionary grants, and eventual statutory reenactment, deeply influencing corporate strategy in Greenville.

The Era of Discretionary Grants (2016 – 2024)

North Carolina’s original statutory R&D tax credit, codified under Article 3F, expired on December 31, 2015. For nearly a decade, the state relied entirely on a combination of corporate tax rate reductions (dropping the corporate income tax rate from 6.9% in 2013 to 2% in 2026, with a schedule to reach 0% by 2030) and discretionary performance-based grants. The primary vehicles for these grants were the Job Development Investment Grant (JDIG) and the One North Carolina Fund.

The NC Breakthrough Act of 2025 (Senate Bill 354)

While JDIG was highly effective for massive relocation projects, it lacked the targeted, predictable mechanics required to foster continuous, localized R&D. Recognizing this gap, the North Carolina General Assembly introduced and passed Senate Bill 354, the NC Breakthrough Act, in the 2025-2026 session. This legislation reenacted and modified Article 3F, extending the R&D credit sunset to January 1, 2040, and implementing a sophisticated, multi-tiered percentage model.

The credit is applied against franchise or income taxes and is capped at 15% of the tax liability. The new tiers are specifically designed to incentivize collaboration with higher education and the utilization of environmentally sustainable industrial infrastructure.

To claim the NC Breakthrough Act credits, a taxpayer must file the NC-478 series forms, specifically Form NC-478I, attaching it to their state return. Because the North Carolina Department of Revenue (NCDOR) adopts the definitions established in federal IRC Section 41, taxpayers must successfully pass the federal four-part test to qualify for the state credit. Notably, because North Carolina tax law currently conforms to the Internal Revenue Code as of January 1, 2023, the NCDOR issued important notices requiring taxpayers to recalculate federal taxable income to exclude post-2023 federal changes (like the OBBBA expensing rules) until state conformity legislation is passed, often necessitating the filing of state extensions.

Tax Administration Guidance and Case Law Analysis

Both the IRS and the NCDOR maintain rigorous evidentiary standards, supported by a dense body of administrative guidance and federal case law. Taxpayers operating in Greenville must navigate these precedents meticulously to avoid costly disallowances during audits.

The IRS Audit Techniques Guides (ATGs)

The IRS utilizes Audit Techniques Guides (ATGs) to instruct revenue agents on specific industry risk profiles. For Greenville’s life sciences sector (Thermo Fisher, Mayne Pharma), the Pharmaceutical Industry ATG provides the ultimate roadmap. The IRS classifies pharmaceutical R&D into four stages:

Preclinical/Discovery Research: High probability of qualification. Identifying viable molecules and laboratory testing.

Clinical Development: High probability of qualification. Phases I, II, and III human trials testing safety, tolerance, and pharmacokinetics, alongside pharmaceutical formulation development.

Regulatory Review: Preparation of the New Drug Application (NDA). Mixed qualification depending on the technical nature of the data analysis.

Post-Marketing: Explicitly identified as non-qualifying. Activities such as answering healthcare provider questions, facilitating off-label usage discussions, and pricing/reimbursement advocacy do not involve a process of experimentation and are disallowed. Furthermore, the costs of obtaining a patent and routine quality control testing are legally excluded from QREs.

For Greenville’s manufacturing entities (Hyster-Yale, DENSO, Grady-White), the General Manufacturing ATG applies. A critical component of this guidance relates to “pilot models.” If a manufacturer builds a prototype to evaluate and resolve uncertainty during development, the engineering labor and materials consumed qualify. However, if the machine is built merely to fulfill a contractual obligation to a customer without attempting to resolve a fundamental design uncertainty, the expenses are disqualified.

Crucial Case Law: Trinity Industries and Little Sandy Coal

The interpretation of the “Process of Experimentation” test is heavily dictated by two landmark court decisions regarding marine and heavy manufacturing, which hold direct implications for Greenville industries like Grady-White Boats.

In Trinity Industries, Inc. v. United States, the taxpayer built six “first-in-class” vessels, including a high-speed craft for military special forces and a novel double-hulled oil barge. The IRS argued that the engineering was merely cafeteria-style “mix and match” design (e.g., combining an existing hull with an existing propulsion system) and did not involve true experimentation. The Fifth Circuit disagreed, ruling that the integration of these systems to meet unprecedented performance metrics inherently required a systematic trial and error methodology. The court established that if 80% or more of the effort that went into the project involved a process of experimentation, the entire cost could qualify. If the 80% threshold was not met for the entire vessel, the taxpayer must apply the “shrinking back” rule, isolating the largest subset of components (e.g., just the hull design) that did meet the 80% test.

Conversely, in Little Sandy Coal Company, Inc. v. Commissioner, the taxpayer attempted to claim the R&D credit for the design of a tanker barge. While the court acknowledged that some of the taxpayer’s activities constituted elements of a process of experimentation, the taxpayer utterly failed to track employee time and costs with sufficient granularity. The taxpayer took an “all-or-nothing” approach, claiming the entire vessel without utilizing the shrinking back rule. Because they could not prove that “substantially all” (80%) of the activities were experimental, the court disallowed the entire tax credit.

For Greenville manufacturers, the lesson is paramount: maintaining a “reconciled listing of all employees’ wages… including full name, job title, cost center, and business component” is not merely an administrative best practice; it is a legal necessity to survive judicial scrutiny.

Final Thoughts

Greenville, North Carolina, has engineered an exceptional industrial ecosystem that seamlessly integrates academic research, heavy manufacturing infrastructure, and aggressive tax policy. The historic transition from an agricultural economy to a hub of pharmaceuticals, marine engineering, and mechatronics was facilitated by strategic land development, such as Indigreen Corporate Park, and the intellectual capital of East Carolina University.

Today, the region is uniquely positioned to exploit the shifting tides of United States tax law. The federal One Big Beautiful Bill Act (OBBBA) of 2025 has restored immediate domestic expensing under IRC Section 174, penalizing offshore research and driving massive capital inflows into domestic facilities like those operated by Thermo Fisher, Hyster-Yale, and DENSO. Simultaneously, the North Carolina General Assembly’s enactment of the NC Breakthrough Act (SB 354) provides a permanent, statutory incentive that heavily rewards the precise architecture of Greenville. By offering a 20% credit for university-partnered research and a 30% to 35% credit for R&D conducted within Eco-Industrial Parks, the state has provided Greenville’s industries with the ultimate fiscal tool to subsidize their technological evolution, ensuring the region remains a premier destination for global innovation.

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.