This study evaluates the United States federal and North Carolina state Research and Development (R&D) tax credit frameworks, exploring their statutory requirements, recent administrative guidance, and pivotal case law. Through five detailed industry case studies specific to Rocky Mount, North Carolina, the analysis demonstrates how regional economic development histories intersect with complex tax code provisions to subsidize technological innovation.

The Regulatory Framework of the Research and Development Tax Credit

The landscape of research and development tax policy is characterized by strict statutory requirements, evolving administrative guidance from tax authorities, and a growing body of judicial precedent. To properly evaluate the eligibility of industrial activities within any regional economy, one must first dissect the fundamental legal requirements at both the federal and state levels. The following sections provide an exhaustive review of the Internal Revenue Code (IRC), Treasury Regulations, and the specific statutory environment of North Carolina.

United States Federal R&D Tax Credit (IRC Section 41 and 174)

The federal R&D tax credit, codified under Section 41 of the Internal Revenue Code (IRC), offers a dollar-for-dollar reduction in a taxpayer’s federal income tax liability for qualified research expenses (QREs). The credit was initially enacted in 1981 as part of the Economic Recovery Tax Act and was made permanent in 2015. It is fundamentally designed to incentivize businesses to maintain and expand technical operations within the United States by subsidizing a portion of the financial risk associated with innovation.

Under IRC Section 41(b)(1), QREs are defined as the sum of in-house research expenses and contract research expenses. In-house expenses include wages paid to employees for qualified services, amounts paid for supplies used in the conduct of qualified research, and amounts paid for the right to use computers (cloud computing) in the conduct of research. Contract research expenses generally represent 65% of amounts paid to third parties performing qualified research on the taxpayer’s behalf, though this can increase to 75% for amounts paid to qualified research consortia.

To qualify for the Section 41 credit, a taxpayer’s activities must satisfy a rigorous set of criteria known as the “Four-Part Test”. This test must be applied separately to each business component—defined as any product, process, computer software, technique, formula, or invention to be held for sale, lease, or license, or used by the taxpayer in a trade or business.

The federal tax code also explicitly outlines excluded activities. Under Section 41(d)(4), qualified research does not include research conducted after the beginning of commercial production, adaptation of an existing business component to a particular customer’s requirement, duplication or reverse engineering of an existing product, routine quality control testing, efficiency surveys, or research funded by another person or governmental entity.

Recent IRS Guidance and Legislative Volatility (2024-2026)

The regulatory environment governing the deductibility of R&E expenditures has experienced profound volatility. Historically, businesses could immediately deduct domestic R&E expenses in the tax year they were incurred, optimizing cash flow. However, beginning in 2022, the Tax Cuts and Jobs Act (TCJA) required companies to capitalize and amortize these costs: domestic R&E expenses over five years, and foreign R&E expenses over fifteen years. This capitalization requirement fundamentally altered corporate tax planning and severely constrained the liquidity of research-intensive manufacturing firms.

Legislative relief materialized with the passage of the One Big Beautiful Bill Act (OBBBA) / P.L. 119-21, which added a new Section 174A to the Internal Revenue Code. For tax years beginning after December 31, 2024, Section 174A(a) reinstates the ability for taxpayers to immediately deduct amounts paid or incurred for domestic research and experimental expenditures. Alternatively, under Section 174A(c), taxpayers retain the election to charge such expenditures to a capital account and amortize them over a period of not less than 60 months. The IRS concurrently issued Revenue Procedure 2025-28, providing transition options for taxpayers to recover unamortized amounts paid or incurred between 2022 and 2024.

Simultaneously, the Internal Revenue Service has intensified its scrutiny of the R&D credit through extensive structural changes to Form 6765 (Credit for Increasing Research Activities). Effective for the 2024 and 2025 tax years, the IRS introduced Section G to the form, mandating the disclosure of granular qualitative and quantitative data directly on the originally filed return. Taxpayers must now identify the total number of business components generating QREs, report the specific amount of officers’ wages included in the claim, and provide narrative descriptions of the information sought to be discovered and the alternatives evaluated during the experimentation process. This unprecedented reporting requirement signals an aggressive administrative posture, necessitating that taxpayers maintain rigorous, contemporaneous documentation to substantiate their claims prior to filing.

North Carolina State R&D Tax Credit (Article 3F and Senate Bill 354)

State-level R&D incentives frequently complement the federal framework, providing critical localized financial relief. Historically, North Carolina offered a robust research and development tax credit under Article 3F of Chapter 105 of the General Statutes (N.C. Gen. Stat. § 105-129.50). This statute provided an incentive for qualified North Carolina research and development expenses, allowing corporations and flow-through entities to offset state franchise or corporate income taxes. However, Article 3F was repealed for taxable years beginning on or after January 1, 2016. Since that sunset date, North Carolina has not offered an active state-specific R&D tax credit, leaving businesses to rely on discretionary grants such as the Job Development Investment Grant (JDIG) and the One North Carolina Fund. Unused Article 3F credits generated prior to 2016 remain valid for a 15-year carryforward period.

As of the 2025-2026 legislative session, a concerted effort to revive the state R&D credit is underway via North Carolina Senate Bill 354, formally titled the “NC Breakthrough Act”. Introduced in March 2025 and currently residing in the Committee on Rules and Operations of the Senate, SB 354 aims to retroactively reenact and modify Article 3F for taxable years beginning on or after January 1, 2025, extending the program’s sunset date to January 1, 2040.

The proposed legislation introduces rigorous taxpayer eligibility standards. To claim the credit, businesses must meet specific wage standards tailored to their regional economic distress levels, provide health insurance covering at least 50% of premiums for all full-time employees, maintain clean environmental records devoid of serious violations, possess no recent willful citations under the Occupational Safety and Health Act (OSHA), and have no unresolved overdue tax debts.

The NC Breakthrough Act strategically tiers credit percentages to incentivize specific types of research and to drive capital into economically distressed regions. The proposed statutory calculations are as follows:

If enacted, the credit will be limited to 15% of the taxpayer’s franchise or income tax liability for the year, a significant reduction from the previous 50% cap, though unused portions may still be carried forward for 15 years. The legislative environment is further complicated by state tax conformity issues. The North Carolina Department of Revenue (NCDOR) recently issued guidance confirming that the state has not automatically updated its Revenue Act to conform to the federal Internal Revenue Code as of tax year 2025. Consequently, taxpayers must calculate state additions and deductions on Schedule PN to account for decoupling from federal provisions like the OBBBA.

Foundational Tax Court Precedents

The application of R&D tax law is heavily dictated by judicial interpretations of the Internal Revenue Code. Taxpayers operating in advanced manufacturing, logistics, and life sciences must construct their credit claims in accordance with the evidentiary standards established in several landmark cases.

• Siemer Milling Co. v. Commissioner (T.C. Memo. 2019-37): This case fundamentally altered the evidentiary landscape for taxpayers claiming the R&D credit in traditional manufacturing and food processing sectors. The taxpayer, an Illinois-based wheat milling company, claimed credits for seven new product development projects. The United States Tax Court disallowed 100% of the claimed credits, ruling that the company failed to provide adequate documentation to prove that “substantially all” of its activities constituted a true process of experimentation. The court noted a complete absence of evidence showing the formulation of hypotheses, systematic trial and error, or scientific modeling. The ruling established that anecdotal descriptions of technical work are insufficient; taxpayers must maintain contemporaneous scientific logs, test results, and empirical data to survive IRS scrutiny.
• Little Sandy Coal Co. v. Commissioner (7th Cir. 2023): In a complex case involving a shipbuilding subsidiary, the courts provided vital clarification regarding the “substantially all” requirement of Section 41(d)(1)(C). The Seventh Circuit affirmed the lower court’s denial of the credit due to poor documentation, specifically regarding the application of the “shrink-back” rule to massive components like dry docks. However, the appellate court delivered a major taxpayer-friendly opinion on the mathematics of the 80% test. The court ruled that the wages of personnel engaged in the “direct support” and “direct supervision” of research can legally be included in both the numerator and the denominator of the 80% calculation, provided those activities qualify as deductible expenses under Section 174. This ruling is critical for manufacturing environments where floor managers and support technicians facilitate engineering trials.
• Suder v. Commissioner (T.C. Memo. 2014-201): Evaluating a telecommunications hardware and software manufacturer, the Tax Court analyzed the eligibility of 12 distinct projects. The court ruled favorably for the taxpayer on 11 projects, noting that developing telecommunications architecture from scratch inherently involved technical uncertainty and a systematic development process. The singular project disallowed was focused solely on modifying the “look and feel” of software, affirming the statutory exclusion of cosmetic or stylistic design. Furthermore, the court heavily scrutinized the CEO’s multimillion-dollar wages claimed as QREs, determining them to be excessive and unreasonable in relation to the actual scientific research performed, thus requiring a reduction in the eligible wage basis.
• Smith v. Commissioner (2025): In a recent Tax Court decision involving an architectural firm, the IRS attempted to disallow credits based on the “funded research” exclusion under Section 41(d)(4)(H). The court denied the IRS’s motion for summary judgment, emphasizing that whether a taxpayer retains “substantial rights” to the research and bears the economic risk of failure often depends on the intersection of federal tax law and specific local contract law. This highlights the necessity of meticulously reviewing client contracts and statements of work to ensure R&D credits are not invalidated by third-party funding clauses.

Industry Case Studies and Economic Development in Rocky Mount

The city of Rocky Mount, North Carolina, presents a unique economic geography. Located at the falls of the Tar River and historically functioning as a critical juncture for the Wilmington-Weldon Railroad, the area’s development has been inextricably linked to transportation infrastructure and natural resources. Spanning both Nash and Edgecombe counties, Rocky Mount navigated the decline of its foundational “Big Three” industries—tobacco, textiles, and furniture—by pivoting aggressively toward knowledge-based enterprises and advanced manufacturing.

This economic renaissance has been fueled by the region’s central East Coast location on Interstate 95, abundant utility infrastructure (water and public power), and targeted workforce training initiatives led by institutions like Nash Community College and Edgecombe Community College. Furthermore, the classification of Nash and Edgecombe as Tier 1 economically distressed counties allows local economic development agencies, such as the Carolinas Gateway Partnership, to offer maximum state and local tax incentives to attract capital. The following five case studies examine major industries indigenous to Rocky Mount, detailing their historical development and analyzing their specific operations against the rigorous standards of federal and North Carolina R&D tax law.

Pharmaceutical and Biomedical Manufacturing (Pfizer)

Historical Economic Development The establishment of a massive pharmaceutical footprint in Rocky Mount represents a pivotal chapter in North Carolina’s transition from agriculture to advanced life sciences. The manufacturing site currently owned by Pfizer was originally established in 1968. Over the decades, it operated as the hospital products division of Abbott Laboratories before spinning off as Hospira in 2004. Pfizer subsequently acquired Hospira for $15 billion in 2015, taking control of the Rocky Mount asset to expand its Global Established Pharmaceutical (GEP) business.

The sustained growth of this specific industry in Rocky Mount is attributable to several intersecting factors. First, the production of sterile injectables requires massive, uninterrupted volumes of purified water; Rocky Mount’s public utility infrastructure, drawing from the Tar River basin, provided this foundational requirement. Second, the geographic positioning along the I-95 corridor allows for rapid logistical deployment of temperature-controlled pharmaceuticals across the Eastern seaboard. Finally, as the local textile and tobacco sectors shed workers in the late 20th century, the region possessed a highly trainable workforce that local community colleges quickly pivoted to instruct in cleanroom protocols and bioprocessing. Today, the 250-acre, 1.4-million-square-foot facility employs over 3,200 professionals and produces roughly 25% of Pfizer’s sterile injectables, equating to nearly 8% of all sterile injectables used in U.S. hospitals.

R&D Tax Credit Eligibility and Legal Application The manufacturing of sterile injectables is an extraordinarily precise scientific endeavor fraught with biological and chemical uncertainties, thereby cleanly satisfying the “elimination of uncertainty” and “technological in nature” prongs of IRC Section 41. The facility manufactures anesthesia, analgesia, therapeutics, and anti-infectives in varied presentations, including terminally sterilized vials, aseptic vials, and ampules.

According to the IRS Audit Techniques Guide for the Pharmaceutical Industry, qualifying research is not limited to early-stage molecular discovery; it extends heavily into clinical development and pharmaceutical technology development (process engineering). When Pfizer engineered its new “R3” sterile injectable manufacturing module—a state-of-the-art formulations area requiring FDA approval—the process involved extensive experimentation. Engineers evaluating multiple aseptic filtration systems, utilizing anaerobic media fill runs to ensure zero bacterial contamination in sealed vials, and miniaturizing separation science platforms are engaging in a quantifiable process of experimentation.

To substantiate federal R&D claims, the wages of formulation scientists, process chemists, regulatory CMC (Chemistry, Manufacturing, and Controls) managers, and direct support laboratory technicians are eligible as in-house QREs. Furthermore, the costs of materials consumed during experimental pilot runs—such as testing ampules, formulation APIs, and biological assay kits—qualify as supply QREs, provided these experimental batches are not commercially sold.

Following the devastating tornado that struck the facility in July 2023, the complex engineering efforts required to expedite the restart of production lines, validate structural integrity, and re-certify cleanroom environments likely generated substantial qualifying activities. Under the pending North Carolina SB 354 (NC Breakthrough Act), Pfizer’s operations in Nash County would qualify for the maximum 3.25% “Low-Tier Research” rate due to the county’s Tier 1 distress designation, circumventing the lower volume-based brackets applied to more affluent counties.

Advanced Heavy Engine Manufacturing (Cummins)

Historical Economic Development Rocky Mount’s evolution into a global center for heavy machinery manufacturing was catalyzed in 1979 through a joint venture between JI Case and Cummins Engine Company, resulting in the creation of the Consolidated Diesel Company (CDC). The facility produced its first engine in 1983 and gradually expanded its technological footprint, introducing 4-valve head technology to improve diesel emissions in 1996. In 2008, Cummins bought out its partner, taking full ownership of the Rocky Mount Engine Plant (RMEP).

The decision to locate and continually expand in the Rocky Mount/Whitakers area was driven by the availability of vast industrial real estate, immediate access to the CSX rail mainline for shipping 1,500-pound engine blocks globally, and an aggressive package of local tax incentives and workforce development grants spearheaded by the Carolinas Gateway Partnership. Today, RMEP spans 1.3 million square feet, employs over 2,000 workers, and recently produced its 5 millionth engine, cementing its status as Cummins’ highest-producing engine facility worldwide.

R&D Tax Credit Eligibility and Legal Application The heavy machinery sector is currently navigating an unprecedented technological shift driven by strict environmental regulations and the mandate to achieve zero emissions. In 2024, Cummins announced a $580 million investment to completely revamp the RMEP assembly lines to accommodate next-generation, lower-carbon products under its “Destination Zero” strategy.

The core of Cummins’ R&D in Rocky Mount revolves around the development of a “fuel-agnostic” internal combustion engine platform. This highly innovative architecture utilizes a standardized base engine below the head gasket, paired with highly customized, interchangeable components above the head gasket optimized for distinct low-carbon fuels, such as natural gas, advanced diesel, and hydrogen. To execute this complex engineering feat, RMEP operates a dedicated Value Package Introduction (VPI) Lab. Within this lab, engineers and technicians construct “Alpha” prototype engines to identify metallurgical fatigue, airflow bottlenecks, and combustion inefficiencies prior to main assembly line “Beta” builds.

The activities within the VPI Lab represent an exemplary application of IRC Section 41. The design of interchangeable cylinder heads capable of managing the unique thermal dynamics of hydrogen combustion presents severe technical uncertainty. The utilization of computational fluid dynamics and metallurgical stress testing confirms the work is technological in nature. Building and dynamometer-testing physical alpha prototypes to evaluate functional alternatives constitutes a textbook process of experimentation.

Tax compliance for these activities is heavily informed by the Little Sandy Coal Co. decision. By strictly defining the parameters of the VPI Lab, Cummins can confidently include the wages of the mechanical engineers designing the prototype, the first-line managers directly supervising the builds, and the technicians machining custom parts as eligible QREs in both the numerator and denominator of the 80% test. Furthermore, under the newly enacted IRC Section 174A, Cummins has the option to immediately deduct the immense R&E capital expenditures associated with the $580 million facility retooling, drastically improving corporate cash flow during this energy transition.

Logistics Automation and Intermodal Transportation (CSX)

Historical Economic Development Rocky Mount’s geographic identity and initial commercial viability were entirely forged by the railroad. The completion of the Wilmington-Weldon Railroad in the 1840s established the town as a vital transfer point connecting northern and southern trade routes. The subsequent establishment of massive rail yard facilities by the Atlantic Coast Line cemented a multi-generational labor force highly skilled in freight logistics.

Leveraging this profound historical infrastructure, CSX Corporation, in collaboration with the North Carolina Department of Transportation (NCDOT), developed the Carolina Connector (CCX), which opened in 2021. The CCX is a 330-acre, $158 million intermodal terminal situated on the CSX mainline just north of Rocky Mount. Located within a two-hour drive of major East Coast deep-water ports and positioned near the intersection of I-95 and the future I-87, the CCX acts as an inland hub. It facilitates the high-speed transfer of up to 110,000 shipping containers annually between trucks and trains, drastically reducing highway congestion and supply chain bottlenecks.

R&D Tax Credit Eligibility and Legal Application Modern logistics companies are effectively evolving into software and robotics firms, engaging in significant technological research. The Carolina Connector is recognized as one of the most technologically advanced facilities within the CSX network. It operates zero-emission, wide-span electric cranes that execute container transfers with near-total automation; operators safely supervise the initial lift and final placement from a remote terminal building. Additionally, the facility utilizes “X-Gate” technology, integrating machine vision cameras to automate the truck in-gate process, streamline traffic flow, and automatically inspect the structural integrity of loads exiting the facility.

Claiming federal R&D credits for logistics automation requires meticulous navigation of the IRC’s “Internal-Use Software” (IUS) exclusions. Treasury Regulations dictate that software developed primarily for a taxpayer’s internal operations—such as inventory tracking or gate management—faces a higher burden of proof. It must satisfy the standard four-part test and an additional three-part “High Threshold of Innovation” test, which requires proving the software is highly innovative, involves significant economic risk, and is not commercially available.

However, the CCX avoids this strict limitation when software is developed as part of a hardware-software integration. The integration of proprietary algorithms with physical robotics (the automated cranes and X-Gate sensors) often qualifies as a single, complex business component. Developing algorithms that analyze import documentation in real-time, predict optimal container stacking arrays on a multi-acre footprint, and dictate the physical motion control of a 165-foot span crane relies heavily on computer science and systems engineering. The wages paid to systems architects and software developers troubleshooting the latency between the machine vision cameras and the crane automation protocols constitute highly eligible QREs. If North Carolina’s SB 354 is enacted, CSX could further leverage the 3.25% Low-Tier Research credit for these software engineering activities conducted in Edgecombe County.

Advanced Food Processing and Science (Poppies International)

Historical Economic Development As global trade policies shifted and the domestic demand for raw tobacco and traditional textiles plummeted in the late 20th century, the Rocky Mount economy required rapid diversification. Regional economic developers aggressively marketed the area’s agricultural legacy, pivoting toward value-added food processing. In 2001, Poppies International, a Belgian-based manufacturer of premium frozen pastries, cream puffs, and macarons, selected Rocky Mount for its United States headquarters and manufacturing operations.

The company established a 12,500-square-meter highly automated plant in the Whitaker Business & Industry Center in Nash County. Rocky Mount was selected due to its central East Coast location on I-95, facilitating overnight distribution of frozen goods to major metropolitan markets. Furthermore, the city’s public utilities offered exceptional power reliability and high-volume water access necessary for industrial baking. The transition was supported by custom workforce training programs in advanced manufacturing operations orchestrated by Nash Community College. Today, the plant operates 24/7, producing 7.5 million kilograms of frozen desserts annually and generating approximately $50 million in sales.

R&D Tax Credit Eligibility and Legal Application The food and beverage manufacturing sector is heavily scrutinized during IRS examinations. Tax authorities stringently enforce the boundary between non-qualifying culinary recipe changes (which relate to taste and style) and qualifying food science experimentation (which relate to functional product improvement) under IRC Section 41(d)(3)(B).

Poppies International’s automated production of millions of frozen pastries requires exact chemical and thermodynamic precision. If Poppies attempts to develop a new frozen macaron formulation that must withstand a 12-month freezer shelf life without suffering from texture degradation, moisture migration, or freezer burn, the company must rely on the principles of biological science, chemistry, and engineering. Adjusting the hydration ratios of the dough, testing novel emulsifiers, and engineering custom automated extrusion nozzles to process higher-viscosity batters are all activities aimed at eliminating technical uncertainty.

To successfully claim the R&D credit and survive an audit, Poppies must explicitly adhere to the evidentiary standards established in Siemer Milling Co. v. Commissioner. In Siemer, a wheat milling company lost its credit entirely because its documentation was anecdotal; the Tax Court ruled that merely describing activities as “product development” without providing evidence of formulated hypotheses or systemic data analysis failed the process of experimentation test. Therefore, Poppies’ Quality Assurance team—who hold degrees in chemical engineering and collaborate with North Carolina State University’s Department of Food Science—must maintain contemporaneous, rigorous testing logs. These logs must record the specific water activity (aw) measurements of test batches, the ambient humidity of the facility during extrusion, and the precise failure rates of experimental packaging designs under thermal stress. By documenting this rigorous scientific methodology, Poppies can legally claim the wages of their food scientists, the cost of trial batch ingredients (supplies), and third-party laboratory testing fees as QREs.

Textile Innovation and Material Science Circularity

Historical Economic Development The industrial genesis of Rocky Mount is synonymous with textile manufacturing. In 1818, Joel Battle founded Rocky Mount Mills, constructing the second cotton mill in North Carolina. Situated precisely at the falls of the Tar River to harness kinetic water power, the original stone structure relied on enslaved labor before transitioning to hired workers in the 1850s. The mill survived a destructive Union cavalry raid in 1863, was rebuilt, and served as the economic heartbeat of the community for over a century. By the late 20th century, however, a confluence of cheap foreign labor, globalization (NAFTA), and rising raw cotton prices forced the historic mill to close its doors in 1996, displacing hundreds of workers.

While the physical footprint of Rocky Mount Mills has been successfully redeveloped into an 82-acre mixed-use residential and commercial campus by Capitol Broadcasting Company, the legacy of textiles in Eastern North Carolina did not perish; it evolved. The region retains the largest concentration of textile workers in the United States, with over 27,000 employees embedded in the sector. The industry has pivoted aggressively from basic cotton spinning to highly technical performance fabrics, nonwovens, and sustainable material science.

R&D Tax Credit Eligibility and Legal Application Modern textile firms operating in the broader Rocky Mount economic sphere are engaged in profound chemical engineering and material science. A definitive example of this innovation is the region’s integration into the National Science Foundation (NSF) Textile Innovation and Sustainability Engine, a massive grant initiative led by North Carolina State University’s Wilson College of Textiles. The core objective of this initiative is “circularity”—creating replicable, scalable systems to capture post-consumer textile waste, chemically degrade the polymers, and re-spin them into advanced, sustainable fibers.

When a regional textile manufacturer attempts to engineer a new synthetic yarn utilizing 50% recycled polyethylene terephthalate (PET) derived from plastic bottles, and that yarn must meet strict military-grade tensile strength and thermal resistance metrics, the company faces deep technical uncertainty. The process of experimenting with different chemical solvent baths to strip dyes from the post-consumer waste, engineering new spinneret extrusion configurations to manage heterogeneous polymer melt flows, and conducting dynamic stress testing on the resulting fibers constitutes qualified research under IRC Section 41.

This sector is uniquely positioned to maximize benefits under the proposed North Carolina SB 354 (NC Breakthrough Act). Section 105-129.55 of the pending legislation explicitly outlines a 20% tax credit for “North Carolina university research expenses”—defined as amounts paid to a state research university to conduct basic or qualified research. If a Rocky Mount textile firm contracts the NC State Wilson College of Textiles to perform highly complex scanning electron microscopy or chemical analysis on their experimental recycled polymers, those expenditures would yield a massive 20% state tax credit. Concurrently, on the federal return, these payments to a qualified research consortium would be eligible for a 75% inclusion rate as contract research expenses under IRC Section 41(b)(3)(C), creating a highly optimized, dual-layered tax strategy.

Strategic Tax Administration and Audit Posture

The realization of R&D tax credits in Rocky Mount requires corporate taxpayers to merge complex engineering operations with sophisticated accounting and legal frameworks. The IRS has demonstrated a strategic willingness to litigate R&D claims, making proactive audit defense critical.

The ASC 730 Directive and Financial Statement Integration For large taxpayers operating in Rocky Mount, such as Pfizer, Cummins, and CSX, the IRS Large Business & International (LB&I) Division provides a crucial administrative safe harbor known as the ASC 730 Directive. Taxpayers who prepare Certified Audited Financial Statements under U.S. Generally Accepted Accounting Principles (GAAP) are required to disclose their R&D costs under Accounting Standards Codification (ASC) 730.

If eligible, the taxpayer can utilize the ASC 730 Directive to structurally bridge their financial statement R&D expenses directly to their IRC Section 41 QREs. This directive significantly reduces the administrative burden of calculating eligible wages and supplies and drastically mitigates audit risk by providing a standardized, IRS-approved reconciliation methodology. Taxpayers elect to follow this directive by checking the appropriate box on Line 41 of the newly revised Form 6765. However, it is important to note that the directive does not cover the purchase or development of internal-use software, which must be evaluated separately.

Navigating North Carolina Conformity and Legislative Ambiguity As of early 2026, corporate tax planning in North Carolina requires navigating significant legislative ambiguity. Because the North Carolina General Assembly has not yet passed the NC Breakthrough Act (SB 354), the state remains without an active statutory R&D tax credit. In the interim, economic development in Rocky Mount continues to rely heavily on negotiated, performance-based cash grants like the Job Development Investment Grant (JDIG).

Furthermore, North Carolina corporate income tax calculations begin with Federal Taxable Income (FTI). Because the state legislature has not passed conformity legislation adopting the recent federal changes in the One Big Beautiful Bill Act (OBBBA), North Carolina tax law remains pegged to the Internal Revenue Code as it existed on January 1, 2023. Consequently, while federal taxpayers can immediately expense their R&E costs in 2025 under the new IRC Section 174A, North Carolina law technically still requires the 5-year capitalization mandated by the TCJA. Corporate tax directors must meticulously calculate these discrepancies, utilizing Schedule PN to execute the necessary state add-backs and deductions to avoid substantial compliance penalties.

Final Thoughts

Rocky Mount, North Carolina, represents a dynamic economic geography where historical industrial infrastructure directly facilitates cutting-edge technological development. From the foundational legacy of the 1818 Rocky Mount Mills to the modern, zero-emission automation of the CSX Carolina Connector, and the advanced fuel-agnostic engineering at the Cummins engine plant, the industries anchoring this region are fundamentally engaged in high-level scientific research.

To secure the financial capital necessary to sustain this innovation, corporations must rigorously apply the federal IRC Section 41 four-part test to their specific operations. It is imperative that biological, physical, and computer science experimentation is exhaustively documented with contemporaneous records, aligning with the stringent evidentiary precedents established in Siemer Milling and Little Sandy Coal. Concurrently, as North Carolina lawmakers debate the retroactive reenactment of Article 3F via the NC Breakthrough Act, businesses operating within Tier 1 counties like Nash and Edgecombe are uniquely positioned to leverage potential 3.25% base rates and 20% university research multipliers. By aggressively aligning their engineering, software, and food science activities with strict statutory tax definitions, Rocky Mount enterprises can optimize their tax liabilities and ensure the region remains a vital node of American industrial manufacturing.

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.