The Statutory Framework of the United States Federal Research and Development Tax Credit

The United States federal Research and Development (R&D) tax credit serves as a foundational economic mechanism designed to incentivize domestic innovation, offset the immense financial risks associated with technological development, and maintain global competitiveness in advanced industrial sectors. For manufacturing and technology enterprises operating in Spartanburg, South Carolina, navigating the intersection of the Internal Revenue Code (IRC) and related Treasury Regulations is a highly lucrative, albeit administratively demanding, endeavor.

Internal Revenue Code Section 41: The Definition of Qualified ResearchThe federal credit for increasing research activities is codified under IRC Section 41. This statute permits taxpayers to claim a nonrefundable tax credit based on the incremental amount of qualified research expenditures (QREs) paid or incurred during a specific taxable year. Qualifying expenditures are strictly defined and generally categorized into three primary buckets: in-house wage expenses for employees directly performing, directly supervising, or directly supporting qualified research; the cost of physical supplies consumed or destroyed during the research process; and a statutorily defined percentage of contract research expenses paid to third-party entities. Specifically, under IRC Section 41(b)(3), taxpayers may capture 65 percent of contract research expenses paid to external contractors, provided those contractors are performing qualified services on behalf of the taxpayer. This percentage increases to 75 percent if the amounts are paid to a “qualified research consortium,” which is defined as a tax-exempt organization under Section 501(c)(3) or 501(c)(6) organized primarily to conduct scientific research.

To ascertain whether an activity qualifies for the credit under IRC Section 41, the research endeavors must satisfy a rigorous, four-part statutory test. Failure to meet any single criterion completely disqualifies the activity and its associated expenditures from the credit calculation.

The first criterion requires that the research be technological in nature. The activities must fundamentally rely on the principles of the hard, physical sciences, such as mechanical engineering, chemical engineering, biological science, or computer science. Research relying on social sciences, economics, or market research is explicitly excluded. The second criterion mandates a permitted purpose. The research must be undertaken with the explicit intention of creating a new business component or improving an existing business component, aiming to enhance its functionality, performance, reliability, or quality. Aesthetic enhancements or minor cosmetic modifications do not meet this standard.

The third criterion is the elimination of technical uncertainty. At the outset of the development project, the taxpayer must encounter genuine technical uncertainty regarding the capability of developing the business component, the method or process necessary to develop it, or the appropriate fundamental design of the component itself. The final, and often most heavily scrutinized criterion, is the process of experimentation. To eliminate the identified technical uncertainty, the taxpayer must identify and conduct a systemic process of evaluating one or more alternatives. This involves the formulation of hypotheses, the utilization of simulation, advanced mathematical modeling, CAD testing, or systematic physical trial and error, followed by iterative refinement based on the experimental results.

The Evolution of IRC Section 174 and the Impact of the OBBBAThe landscape governing the deductibility of federal R&D expenditures has experienced unprecedented volatility in recent years, heavily impacting corporate tax planning strategies in industrial hubs like Spartanburg. Historically, under IRC Section 174, businesses were permitted to immediately expense all domestic research and experimental (R&E) expenditures in the year they were incurred, providing massive upfront cash flow benefits. However, the passage of the Tax Cuts and Jobs Act (TCJA) of 2017 introduced delayed amendments that fundamentally altered this paradigm. For tax years beginning after December 31, 2021, the TCJA mandated that taxpayers could no longer immediately expense these costs; instead, they were required to capitalize and amortize domestic R&E expenditures over a five-year period, and foreign R&E expenditures over a fifteen-year period.

This amortization requirement severely constricted short-term cash flows for research-intensive manufacturing firms. However, the legislative framework was dramatically reversed with the enactment of the One Big Beautiful Bill Act (OBBBA), formally known as Public Law 119-21, which was signed into law in July 2025. The OBBBA represents a watershed moment for domestic innovation. The legislation created a new statutory provision, Section 174A, which permanently restores the full and immediate expensing of domestic R&E expenditures for taxable years beginning after December 31, 2024.

Crucially, the OBBBA also provides sweeping retroactive relief for the transitional years of 2022, 2023, and 2024. The legislation differentiates this relief based on the size of the enterprise. Small businesses, statutorily defined as those with average annual gross receipts of $31 million or less, are granted the ability to make a retroactive election to completely remove the Section 174 amortization requirement for the 2022-2024 period. Under the procedural guidance issued by the Internal Revenue Service in Revenue Procedure 2025-28, these eligible small businesses can file amended tax returns or Administrative Adjustment Requests (AARs) for partnerships to claim missed R&D credits and recover immediate cash refunds directly from the Treasury. Alternatively, they may file a change in accounting method on a 2024 return using a Section 481(a) adjustment to accelerate all unamortized costs into a single tax year.

Conversely, large businesses exceeding the $31 million gross receipts threshold cannot retroactively elect immediate expensing for prior years. However, they are permitted to accelerate the deduction of their remaining unamortized domestic R&E costs into the 2025 or 2026 tax years, ensuring that the financial benefit is ultimately recovered, albeit on a delayed timeline. It is critical to note that the OBBBA explicitly maintained the TCJA’s penalizing treatment of foreign R&E expenditures, which must still be capitalized and amortized over 15 years, thereby reinforcing the strategic imperative for multinational corporations to localize their research operations within domestic jurisdictions like Spartanburg.

The Statutory Framework of the South Carolina State Research and Development Tax Credit

In tandem with the federal incentives, the State of South Carolina administers a highly competitive, state-level R&D tax credit engineered to reward innovative enterprises that physically locate their high-value operations within the state’s borders. Governed by S.C. Code Section 12-6-3415 and rigorously administered by the South Carolina Department of Revenue (SCDOR), the state credit interacts intimately with the federal code while deploying distinct calculation methodologies and utilization limitations.

Mechanics of S.C. Code Section 12-6-3415The South Carolina Research Expenses Credit is designed to offset corporate income taxes, corporate license fees, and individual income tax liabilities for pass-through entities under Chapter 6 of the state code. A foundational prerequisite for claiming the South Carolina credit is that the taxpayer must actively claim the federal income tax credit pursuant to IRC Section 41 for increasing research activities in the exact same taxable year. South Carolina explicitly leverages the federal rules regarding the definition of qualified research and the four-part test; however, the state strictly limits the geographic scope of the credit to expenditures that were incurred physically within the state of South Carolina.

The calculation of the state credit is notably simpler and often more generous than the federal calculation. While the federal credit requires complex historical base amount calculations involving fixed-base percentages and average annual gross receipts spanning prior years, South Carolina requires no base calculation. The state credit applies a flat 5 percent rate directly to all qualified South Carolina-sourced QREs incurred during the taxable year. There is no minimum base floor or startup phase-in requirement at the state level.

However, the utilization of the generated credit is subject to strict statutory caps. Under S.C. Code Section 12-6-3415, the R&D tax credit taken in any single taxable year cannot exceed 50 percent of the taxpayer’s remaining state tax liability after all other applicable state credits have been applied. This ordering rule is vital; administrative guidance from the SCDOR dictates that applying the R&D credit before other credits in an attempt to bypass the 50 percent limitation will result in the immediate recalculation of the return, generating a bill for additional tax, accrued interest, and severe penalties. To mitigate the impact of this 50 percent limitation, South Carolina allows a generous 10-year carryforward period for any unused R&D tax credits, providing long-term strategic value for cyclical manufacturing industries.

Legislative Conformity and State-Level DecouplingThe interaction between federal and state tax law in South Carolina is governed by an annual conformity update. S.C. Code Ann. § 12-6-40 stipulates that South Carolina’s income tax laws generally conform to the Internal Revenue Code of 1986 on a static basis. Following the 2025 legislative session, the state officially conformed to the IRC as amended through December 31, 2024, subject to specific, codified exceptions listed in S.C. Code Ann. § 12-6-50 (which notably rejects federal bonus depreciation provisions under IRC § 168(k) and interest limitation rules under IRC § 163(j)).

Because the federal One Big Beautiful Bill Act (OBBBA) was enacted in July 2025, after the close of the South Carolina legislative session, a significant conformity lag exists. South Carolina has not yet had the legislative opportunity to formally adopt the sweeping changes made by the OBBBA, including the restoration of full expensing under the new Section 174A. Consequently, until the South Carolina General Assembly reconvenes and enacts an updated conformity bill, taxpayers operating in Spartanburg must navigate complex decoupling procedures. They will be required to make specific adjustments on their state income tax returns if they are claiming OBBBA provisions on their federal returns. Furthermore, South Carolina tax authorities explicitly mandate that any state-level amortization claimed regarding research expenditures cannot be duplicative of amortization claimed for federal tax purposes.

Interaction with Ancillary State Economic IncentivesFor major industrial players in Spartanburg, the R&D credit does not operate in a vacuum; it is part of a broader portfolio of economic incentives. For instance, the South Carolina Headquarters Credit (S.C. Code Section 12-6-3410) provides a 20 percent credit on qualifying real and personal property costs for expanding headquarters or research facilities, provided the expansion results in the creation of at least 40 new full-time jobs paying twice the state per capita income and offering full benefits. Similarly, the South Carolina Job Tax Credit (S.C. Code Section 12-6-3360) offers valuable offsets for creating new full-time jobs at qualifying service-related or manufacturing facilities. Because the R&D credit’s 50 percent liability cap applies only after all other credits are utilized, Spartanburg corporate tax directors must utilize sophisticated financial modeling to optimize the precise sequence in which the Headquarters Credit, the Job Tax Credit, and the R&D Credit are applied to the corporate tax return.

The Economic Evolution of Spartanburg, South Carolina

To fully comprehend the relevance and application of research and development tax credits in Spartanburg, one must analyze the region’s extraordinary industrial metamorphosis. The economic geography of Spartanburg is not arbitrary; it is the culmination of centuries of deliberate infrastructural development, acute crises brought on by globalization, and aggressive, visionary economic pivoting by regional leadership.

The Rise of the “Hub City” and the Textile EmpireThe formalized history of Spartanburg County commenced following a 1753 treaty with the Cherokee Nation, leading to its official formation in 1785. The region was named after the Spartan Regiment, a local militia unit that played a decisive role in the Revolutionary War, particularly at the nearby Battle of Cowpens. Following the devastating economic impact of the American Civil War, Spartanburg recognized that industrialization required vast transportation networks. By aggressively courting railroad development, the city became the intersection for numerous rail lines traversing multiple directions, earning it the enduring moniker, the “Hub City”.

This unparalleled logistical advantage drastically reduced transportation costs, making the region a highly desirable location for the burgeoning textile industry. During the late 19th and early 20th centuries, Spartanburg systematically transformed itself into the textile capital of the world. Nearly 40 expansive brick textile mills were constructed across the county, including historic operations such as the Anderson Mill (the oldest standing mill in the state), Beaumont Mill, Drayton Mills, Inman Mills, and the Arcadia Mills. The rapid expansion of these mills was fueled by the proximity to raw cotton crops, a lack of labor unionization, and the innovative use of river-powered turbines. Archeological and historical data indicate that local mills heavily utilized advanced water wheel developments, transitioning from standard tub wheels to highly efficient “scroll case” turbines and reaction wheels capable of generating immense horsepower to drive the sprawling spinning and weaving machinery. By the early 1900s, this infrastructure propelled South Carolina to become the second-largest cotton textile-producing state in the nation.

The Crisis of Globalization and the Strategic PivotThe dominance of the Spartanburg textile industry began to erode in the 1930s, but the true crisis materialized in the 1980s and 1990s as the United States faced insurmountable pressure from low-cost international competition. Unable to compete on wages in the bulk production of standard commodity goods, dozens of historic mills were forced to shutter their operations, leaving behind massive, blighted brick complexes and thousands of displaced workers.

Faced with severe economic decline, regional industrialists and political leaders executed a massive strategic pivot. They recognized that the region’s survival depended entirely on transitioning from semi-skilled commodity production to high-value, highly engineered advanced manufacturing and proprietary chemical development. A watershed moment in this economic renaissance occurred in 1994 when BMW Manufacturing Company established its massive assembly plant in nearby Greer, rolling the first South Carolina-made BMW off the assembly line. This single investment catalyzed a profound regional transformation. The surplus of semi-skilled labor previously employed in textile mills was rapidly absorbed, retrained, and redeployed into precision automotive manufacturing.

Simultaneously, local institutions invested heavily in supporting infrastructure. The development of the South Carolina Inland Port, which recently completed a $55 million expansion to double its cargo capacity, solidified the region’s logistics network by connecting the Upstate directly by rail to the deepwater Port of Charleston. Furthermore, academic partnerships, such as the Clemson University International Center for Automotive Research (CU-ICAR), were established to produce specialized engineering talent precisely tailored for the new industrial base.

Today, Spartanburg County is recognized as an international business center located within a highly coveted “golden quadrant” at the intersection of Interstates 85, 26, 385, and 185. The county leads the state of South Carolina in economic investment, boasting the highest per-capita foreign direct investment. Since 2021 alone, Spartanburg has successfully recruited 80 major economic development projects, securing $5.1 billion in capital investment and creating 5,787 new jobs. The historic textile mills that once defined the area, such as Drayton Mills and Arcadia Mills, have been revitalized via multi-million dollar investments into commercial lofts, corporate offices, and spaces like the Mayfair Art Studios, symbolizing the region’s successful transition into a diversified, high-growth, modern economy dominated by automotive, advanced materials, biosciences, and aerospace sectors.

Federal and State Administrative Guidance and Case Law Precedents

Taxpayers in Spartanburg seeking to claim the research and development tax credit must operate within the strict evidentiary boundaries established by key federal tax court cases and state administrative law decisions. These judicial rulings dictate the rigorous substantiation requirements necessary to survive an audit and define complex concepts such as the assumption of financial risk in contract manufacturing.

Federal Substantiation and the “Process of Experimentation”The Internal Revenue Service (IRS) aggressively challenges R&D claims that lack contemporaneous, granular documentation linking specific employee activities to the resolution of defined technical uncertainties. The burden of proof rests entirely on the taxpayer.

The recent tax court ruling in Moore (T.C. Memo. 2023-20) serves as a critical warning for Spartanburg engineering and manufacturing firms regarding executive wage inclusion. In this case, the IRS challenged the qualification of wages paid to an S corporation’s president and Chief Operating Officer, who was an engineer by trade. Although the executive was heavily involved in defining client requirements and “new product development,” the court disallowed a significant portion of his wages. The ruling explicitly stated that merely defining high-level specifications for a product does not constitute qualified research. Furthermore, because the executive was not the first-line manager directly supervising the bench engineers conducting the daily testing, his time did not qualify under the “direct supervision” provision. For local firms, Moore establishes that high-level executive time is rarely acceptable without rigorous time-tracking proving direct, hands-on involvement in the experimental process.

The precedent established in Little Sandy Coal Co. (T.C. Memo. 2021-15; aff’d, 7th Cir. 2023) is equally vital, particularly for heavy industrial manufacturers. In a dispute involving the design of a novel shipbuilding dry dock, the court ruled against the taxpayer primarily due to a lack of documentation. The taxpayer relied on oral testimony to estimate wage expenses, failing to definitively prove that “substantially all” (defined statutorily as at least 80 percent) of the activities constituted elements of a scientific process of experimentation. The court emphasized that merely designing a complex vessel is insufficient; the taxpayer must provide physical evidence showing exactly how “hypotheses and alternatives were tested and refined in a scientific manner” to overcome a specific technical failure.

Conversely, the decision in Fudim (T.C. Memo. 1994-235) demonstrates when estimation may be permissible under the Cohan rule. The Fudims were pioneers in rapid modeling, utilizing ultraviolet light and light-sensitive liquid polymers to fabricate plastic objects. Despite a lack of formal time-tracking systems, the court accepted their wage estimations. However, this acceptance was contingent upon overwhelming corroborating evidence, including multiple filed patents, published scientific articles, and the profound technical backgrounds of the founders. Similarly, cases like Suder (T.C. Memo. 2014-201) and Shami (T.C. Memo. 2012-78) highlight the necessity of technical credibility. In Suder, the court accepted estimations made by a VP with deep institutional technical knowledge, while in Shami, the court rejected estimations made by a CEO and VP who entirely lacked scientific or engineering backgrounds.

The Funded Research Exclusion in Contract ManufacturingGiven Spartanburg’s dense ecosystem of Tier-1 and Tier-2 suppliers supporting massive Original Equipment Manufacturers (OEMs), the “funded research exclusion” is a heavily litigated area of tax law. Under IRC Section 41(d)(4)(H), research is explicitly excluded from the credit if it is funded by another entity via a contract or grant.

The judicial interpretations in Smith v. Commissioner and Phoenix Design Group, Inc. v. Commissioner dictate the dual-pronged test for contract research eligibility. First, the taxpayer performing the research must retain “substantial rights” to the research results, meaning they are not prohibited from utilizing the engineered knowledge in their broader business operations. Second, and most critically, the taxpayer must bear the pure economic risk of failure. If a Spartanburg engineering firm operates under a “time-and-materials” contract where the OEM pays for hours worked regardless of the prototype’s success, the research is deemed “funded” and is disqualified. To successfully claim the credit, the supplier must operate under a “fixed-price” contract, where payment is entirely contingent upon the successful delivery, installation, and performance of the engineered component, forcing the supplier to absorb the financial losses of any failed iterations.

South Carolina Administrative Law and Department of Revenue ConstraintsAt the state level, the South Carolina Administrative Law Court (ALC) and the State Supreme Court provide vital oversight of the SCDOR’s administrative interpretations of tax incentive statutes. This judicial oversight often serves to protect corporate taxpayers from overly restrictive administrative assessments.

For example, in a highly relevant ruling involving the South Carolina Investment Tax Credit, the South Carolina Court of Appeals overturned a massive audit assessment by the DOR. The DOR had interpreted the statute to enforce a rigid “lifetime cap” on the credits a taxpayer could claim; however, the court ruled that the statute clearly intended for the limit to function as an “annual credit cap,” restoring multi-millions in disallowed credits to the taxpayer. This precedent indicates that South Carolina courts will strictly adhere to legislative text and intent, rejecting administrative overreach.

However, taxpayers must strictly adhere to procedural guidance issued via SC Revenue Rulings. For instance, SC Revenue Ruling #16-11 provides definitive boundaries on activities that trigger corporate income tax nexus, while SC Revenue Ruling #25-5 outlines the strict maintenance requirements for the Job Tax Credit over a five-year period. Most importantly, the SCDOR mandates precise credit ordering rules. As noted in the agency’s policy manuals, taxpayers must be acutely aware that applying the R&D credit (S.C. Code Ann. § 12-6-3415) before other credits to bypass its 50 percent remaining liability limitation is an illegal ordering maneuver. Doing so immediately triggers a recapture event, wherein the state will assess additional taxes, punitive fines, and statutory interest against the corporation.

Industry Case Studies in Spartanburg, South Carolina

The following five detailed case studies illustrate how specific, dominant industries developed within the unique geographic and historical context of Spartanburg, and precisely how companies within these sectors satisfy the rigorous federal and state statutory requirements to legitimately claim R&D tax credits.

Automotive Manufacturing and Soft MobilityHistorical Development in Spartanburg: Spartanburg’s evolution from a declining textile center to a premier international automotive hub was officially catalyzed by the 1994 opening of the BMW Manufacturing facility, which produced the first South Carolina-made vehicle. However, this transition was only possible because the region possessed the massive industrial infrastructure left behind by the textile era—specifically, immense water and sewer capacities designed for fabric dyeing, extensive rail networks, and a large population accustomed to shift-based, highly mechanized factory labor. Over the subsequent three decades, an incredibly dense ecosystem of more than 500 automotive suppliers migrated to the Upstate to support OEM operations. Global leaders such as Michelin, Dräxlmaier, Röchling, Magna, and ZF Chassis Systems established massive local footprints. Today, South Carolina stands as the national export leader in completed passenger vehicles and ranks first in tire production. Recently, the region’s automotive prowess has expanded into the development of electric vehicle (EV) battery sub-sectors and “soft mobility” (nonmotorized, advanced transportation) initiatives, leveraging the established precision manufacturing base.

Application of the R&D Tax Credit Laws:

A Spartanburg-based Tier-1 automotive supplier is contracted to manufacture specialized lightweight, high-tensile composite chassis components for a next-generation OEM electric vehicle platform.

• Federal Eligibility (IRC § 41): The supplier immediately encounters technical uncertainty regarding how the novel composite materials will withstand the altered, high-density load distributions generated by heavy EV battery packs placed along the vehicle floor (Elimination of Uncertainty). The engineering team, relying fundamentally on the principles of mechanical engineering and advanced material science (Technological in Nature), must design new programmable logic controllers (PLCs) for their automated welding and extrusion lines to handle the new composites. They utilize sophisticated CAD software to run finite element analysis (FEA) to simulate stress limits and crash load tolerances prior to physical tooling (Process of Experimentation). The explicit purpose is to improve the safety parameters and weight efficiency of the chassis component (Permitted Purpose). To avoid the funded research exclusion articulated in Phoenix Design Group, the supplier operates under a strict fixed-price contract with the OEM, forcing the Spartanburg supplier to absorb the financial cost of all rejected prototypes and failed iterations, thus proving they bear the economic risk. The wages of the mechanical engineers and the cost of the physical composite resins destroyed during stress testing constitute eligible QREs. Under the new OBBBA legislation, the firm can fully and immediately expense these domestic research costs.
• South Carolina Eligibility (S.C. Code § 12-6-3415): Because the FEA simulations, PLC programming, and physical prototype destruction occur entirely within the supplier’s Spartanburg facility, 100 percent of these specific QREs qualify for the state’s 5 percent credit. The firm uses this generated credit to offset up to 50 percent of its state corporate income tax liability, significantly improving the ROI of the new manufacturing line.

Advanced Textiles, Polymers, and Specialty MaterialsHistorical Development in Spartanburg: While the bulk production of commodity apparel shifted overseas in the late 20th century, the highly specialized fields of advanced textiles and polymer chemistry thrived and expanded in Spartanburg. This survival was the result of deliberate corporate strategies, pioneered most notably by Milliken & Company. Recognizing that domestic mills could not compete on cheap labor, visionary leader Roger Milliken moved the company’s research base to Spartanburg to centralize innovation. In 1958, the company established a massive research park at the intersection of I-85 and I-585, staffing the Deering Milliken Research Corporation (DMRC) with PhD-level mechanical engineers and chemists. This profound commitment to scientific research led to global technical breakthroughs, including the “Belfast” process (which allowed for the wet cross-linking of cotton for drip-dry fabrics) and Visa Soil Release technologies. This legacy of high-level chemical innovation attracted other global petrochemical and advanced materials conglomerates to the county. Today, firms like Toray Industries (fusing nanotechnology, organic synthetic chemistry, and polymer chemistry to produce carbon fiber composite materials) and Indorama Ventures (operating Auriga Polymers, a massive petrochemical producer evolved from a 1966 fiber plant) dominate the local landscape.

Application of the R&D Tax Credit Laws:

A Spartanburg polymer manufacturing plant initiates a multi-year project to develop a novel, fire-retardant geotextile fabric specifically designed for harsh civil engineering and transportation infrastructure applications.

• Federal Eligibility (IRC § 41): The fundamental reliance on advanced polymer chemistry and nanotechnology explicitly satisfies the “technological in nature” requirement of the four-part test. The profound technical uncertainty lies in formulating a chemical resin capable of achieving necessary fire-retardant properties without subsequently degrading the tensile strength and flexibility of the extruded synthetic fiber. The company conducts systematic trial-and-error batch testing in its Spartanburg chemical pilot plant, continuously tweaking the chemical extrusion temperatures, pressure variables, and synthetic additive ratios based on empirical testing data (Process of Experimentation). The wages of the chemical engineers operating the pilot plant, along with the massive costs of the raw chemical intermediates consumed and destroyed during failed test runs, are highly lucrative eligible QREs. Following the documentation precedents set in Little Sandy Coal, the firm maintains rigorous, timestamped laboratory logs proving that “substantially all” of the pilot batches were created strictly for experimental evaluation rather than routine commercial production.
• South Carolina Eligibility (S.C. Code § 12-6-3415): The company must first ensure they claim the federal credit. Once completed, the substantial wages paid to the local chemical engineers and the supplies consumed in the local pilot plant are mapped to the state calculation, yielding a flat 5 percent credit. Given the highly cyclical nature of the global petrochemical market, if the company’s state tax liability in the current year is lower than the massive credit generated by the capital-intensive pilot scale-up, the excess credit is protected by South Carolina’s 10-year carryforward provision, preserving the financial asset for use during highly profitable future fiscal cycles.

Life Sciences, Biotechnology, and Medical DevicesHistorical Development in Spartanburg: The life sciences sector has rapidly emerged as South Carolina’s fastest-growing industry, carrying an immense economic impact approaching $12 billion annually across the state. Spartanburg’s entry and subsequent dominance in this sector was deeply influenced by its existing textile manufacturing prowess. During the decline of standard textiles, agile local companies adapted their specialized manufacturing infrastructure for critical medical and pharmaceutical use. A prime example is Contec, Inc., founded in Spartanburg in 1988. Contec initially focused on developing specialized fabric wipers for contamination control in mission-critical cleanroom environments. By the early 1990s, they pioneered the development of pre-saturated industrial wipes, successfully transferring highly controlled textile weaving and chemical application concepts into the stringent biomedical and pharmaceutical spaces. Today, Spartanburg boasts a comprehensive life sciences ecosystem, supported by world-class institutions like Spartanburg Regional Health, the Edward Via College of Osteopathic Medicine (VCOM), and specialized biotech startups. Recently, Xoted Biotechnology Labs established a cutting-edge, $4.2 million research and development center in Duncan (Spartanburg County), focusing on plant-based detoxification, seed research, and next-generation applications in cleanroom technology textiles.

Application of the R&D Tax Credit Laws:

A medical device manufacturer located in the Spartanburg Spark Center is developing a new line of sterile, single-use surgical instruments that utilize advanced 3D rapid modeling and proprietary, infection-resistant antimicrobial polymer coatings.

• Federal Eligibility (IRC § 41): The biomedical engineering team faces severe technical uncertainty regarding the optimal injection molding temperatures required to cure the polymer without warping or degrading the active antimicrobial agents. Their highly iterative design process, which involves creating 3D-printed prototypes, running computational fluid dynamics on the injection molds, and conducting extensive microbiological swab testing to validate sterilization efficacy, directly mirrors the acceptable practices upheld in the landmark Fudim tax court case (which validated the rapid modeling of plastics via light-sensitive polymers as a legitimate process of experimentation). The wages of the biomedical engineers, the laboratory technicians performing the sterilization validation protocols, and the expensive medical-grade resins used and discarded in prototype molds are all qualified expenditures.
• South Carolina Eligibility (S.C. Code § 12-6-3415): The Upstate region is highly active in medical research, with over 700 clinical trials occurring across various fields including oncology and genetics. Because the clinical trial coordination, prototype manufacturing, and biological testing occur entirely within Spartanburg, these expenditures are captured for the state calculation. To ensure strict compliance during a SCDOR audit, the company’s tax professionals must rigorously delineate and exclude any wages associated with “routine quality assurance testing” of commercialized products (which is expressly prohibited from R&D credit inclusion) from the true experimental testing required to establish the baseline efficacy of the new antimicrobial coating.

Food and Beverage Processing and ManufacturingHistorical Development in Spartanburg: Spartanburg’s geographic positioning creates unparalleled logistical supremacy; situated perfectly between Atlanta and Charlotte along the I-85 corridor, manufacturers based here can reach over 102 million American consumers within a single day’s drive. This geographical advantage, combined with the region’s abundant municipal water and sewer capacity (originally scaled for textile dyeing), low manufacturing unionization rates, and proximity to regional agricultural hubs, has transformed the county into a premier destination for global food and beverage processing. Industry titans have recognized these assets and made massive, sustained capital investments. Nestlé, the world’s largest food producer, has manufactured frozen specialties in nearby Gaffney since 1980. Keurig Dr Pepper (KDP) broke ground on a state-of-the-art facility in Moore (Spartanburg County) in 2019. Recently, KDP announced an additional $141 million investment to dramatically expand its highly automated, LEED-certified coffee roasting and packaging operations in the county. Additionally, Milo’s Tea Company recently established its first South Carolina operations in Spartanburg with a $130 million investment in a massive brewing facility.

Application of the R&D Tax Credit Laws:

A massive beverage manufacturing facility in Spartanburg is tasked with designing, engineering, and scaling the mass production of next-generation, environmentally sustainable, plastic-free coffee pods (similar to KDP’s innovative “K-Rounds”). These novel pods are created from densely pressed ground coffee beans and wrapped in a proprietary, protective plant-based coating.

• Federal Eligibility (IRC § 41): Scaling a delicate, laboratory-created plant-based coating into high-speed, mass automated production involves intense and complex technical uncertainty. The engineering and food science teams must engage in a rigorous process of experimentation to discover the precise automated roasting thermal profiles, the exact mechanical pressing pressures, and the microscopic coating application techniques that will simultaneously preserve consumer flavor profiles, ensure multi-month shelf stability, and survive extreme shipping temperatures without utilizing traditional plastic barriers. This effort relies heavily on the principles of food science, thermodynamics, and industrial engineering (Technological in Nature). Furthermore, the custom engineering of innovative cellular manufacturing processes and bespoke packaging robotics required to handle these fragile new pods qualifies as highly eligible R&D.
• South Carolina Eligibility (S.C. Code § 12-6-3415): The state’s robust academic infrastructure provides distinct advantages; for instance, Clemson University’s unique Packaging Sciences program often collaborates with local industry to pioneer the future of food manufacturing. If the beverage manufacturer contracts testing out to the university, those amounts are subject to the 65 percent (or potentially 75 percent if qualifying as a research consortium under IRC Section 41(b)(3)(C)) federal limitation before flowing into the state calculation. Ultimately, the direct wages of the food scientists, industrial engineers, and robotics programmers working physically at the Spartanburg roasting facility generate a highly valuable 5 percent state tax credit.

Industrial and Environmental Specialty ChemicalsHistorical Development in Spartanburg: While polymer and synthetic fiber chemistry evolved directly from the textile mills, a distinct sub-sector of industrial and specialty chemical manufacturing also took root in Spartanburg. This sector originally developed in symbiosis with the textile industry, established to provide the vast quantities of industrial dyes, bleaches, and sizing chemicals required for massive fabric outputs. As the textile industry faded, the heavy chemical infrastructure remained and evolved to serve modern, global industrial and environmental markets. The presence of highly specialized tank storage farms, robust chemical railcar offloading facilities, and a workforce deeply familiar with hazardous material handling and stringent environmental safety protocols attracted independent specialty chemical firms. Today, companies like PIDC (Pacific Industrial Development Corporation), a specialty manufacturer of advanced alumina materials, proprietary formulated powders, and rare earth elements, have expanded heavily into Spartanburg. Similarly, Synthomer, a global leader supplying advanced acrylic and vinyl emulsions, relies on its Spartanburg site—which boasts a 50-year history of operations—to expand into new global markets.

Application of the R&D Tax Credit Laws:

A specialty chemical manufacturer in Spartanburg initiates a high-stakes project to develop a new, entirely environmentally friendly aqueous solvent for heavy industrial coatings, designed specifically to replace a volatile organic compound (VOC)-heavy legacy product that faces impending federal EPA bans.

• Federal Eligibility (IRC § 41): Developing the new aqueous solvent requires profound expertise in physical chemistry, organic chemistry, and fluid dynamics, explicitly satisfying the “technological in nature” mandate. The researchers must navigate immense technical uncertainty to determine the optimal molecular weights and complex surfactant interactions necessary to ensure the new, water-based solvent can cut through heavy industrial greases and perform adequately under extreme industrial temperature conditions. The highly iterative chemical formulation process, the scaling of pilot batch synthesis, and the rigorous viscosity and evaporation testing constitute a textbook process of experimentation. The wages of the research chemists, the substantial cost of expensive raw chemical feedstocks used and destroyed in experimental batches, and the facility utilities directly consumed during the pilot phase (if meticulously documented) qualify as critical QREs. Following the strict documentation precedent established in Little Sandy Coal, the manufacturer maintains detailed, contemporaneous laboratory information management systems (LIMS) demonstrating that the pilot batches were created strictly for experimental evaluation.
• South Carolina Eligibility (S.C. Code § 12-6-3415): Given the massive capital-intensive nature of chemical scale-up and safety testing, the QREs generated in this sector are exceptionally high. The 5 percent state credit generated by the wages and supply costs of the Spartanburg facility provides critical cash flow protection against the inherent risks of chemical R&D. Furthermore, because the development of a new industrial solvent can take years before achieving commercial profitability, the state’s 10-year carryforward provision ensures that credits generated during these intensive R&D cycles are preserved and eventually monetized.

Strategic Directives and Compliance Imperatives for Spartanburg Taxpayers

For businesses operating within the dynamic economic landscape of Spartanburg, the synthesis of federal and state Research and Development tax credits presents a powerful, highly lucrative fiscal strategy. However, executing this strategy is fraught with severe regulatory compliance risks, requiring meticulous corporate oversight.

First, Spartanburg manufacturers must implement aggressive, granular substantiation strategies. The tax court ruling in Moore explicitly underscores the absolute necessity of rigorous time-tracking. Companies can no longer rely on generic job titles or high-level job descriptions to justify wage inclusion. Tax departments must mandate project-based accounting systems that track engineering and technician hours directly to specifically defined technical uncertainties and experimental activities. Audit defense documentation should routinely include timestamped CAD drawings, meeting minutes explicitly discussing design failures, empirical test logs, and iteration reviews.

Second, the region’s dense network of Tier-1, Tier-2, and Tier-3 suppliers must subject their Master Service Agreements (MSAs) and Statements of Work (SOWs) to severe contractual scrutiny. To successfully avoid the funded research exclusion dictated by the Smith and Phoenix Design Group cases, suppliers must ensure their legal contracts explicitly assign them the pure financial risk of technical failure. This means negotiating fixed-price terms, refusing milestone payments that are untethered to performance guarantees, accepting strict warranty requirements, and legally securing substantial rights to utilize the developed intellectual property in future, unrelated business operations.

Finally, corporate tax directors must expertly navigate the complexities of the 2025 OBBBA legislation and the resulting state conformity lags. The OBBBA provides a massive, unprecedented windfall for domestic research by eliminating the burdensome Section 174 amortization requirement for tax years 2025 onward, and providing critical retroactive cash-refund pathways for the 2022-2024 period. Spartanburg’s eligible small business manufacturers (those under $31 million in gross receipts) should immediately consult with tax counsel to execute amended federal returns or AARs to reclaim lost deductions and monetize these newly available R&D credits. However, tax departments must simultaneously monitor the South Carolina General Assembly with extreme vigilance. Because South Carolina currently conforms to the IRC only as of December 31, 2024, state corporate income tax returns will temporarily require complex decoupling adjustments to account for the federal OBBBA changes until the state legislature enacts an updated conformity bill. Managing this dual-track compliance environment is essential to preventing state-level audit assessments while maximizing federal cash recovery.

Final Thoughts

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.