Industry Case Studies in Roanoke, Virginia

The economic history of Roanoke, Virginia, represents a profound narrative of industrial adaptation, transitioning from a heavy rail infrastructure hub to a diversified technological center. Originally incorporated as the town of Big Lick, the municipality was fundamentally transformed in 1882 when the Norfolk and Western (N&W) Railway selected the site for its corporate headquarters and manufacturing shops. For a century, the regional economy was inextricably linked to heavy rail infrastructure. Following the 1982 merger that created the Norfolk Southern Corporation, the railway’s corporate headquarters relocated, precipitating a wave of manufacturing closures. Faced with this vacuum, local policymakers orchestrated a strategic pivot toward a service, healthcare, and advanced technology economy—an economic development strategy colloquially termed “beer, bikes, and brains”. The following five case studies examine distinct industries that have flourished in Roanoke and detail how their activities align with complex federal and state R&D tax laws.

Detailed Analysis: United States Federal R&D Tax Credit Requirements

The federal R&D tax credit, codified under IRC § 41, is designed to incentivize businesses to invest in domestic technological innovation. The credit yields a dollar-for-dollar reduction in a taxpayer’s federal income tax liability.
The IRC Section 41 Four-Part Test
To qualify for the federal credit, expenditures must qualify as research and experimental (R&E) expenditures under IRC § 174, and the underlying activities must satisfy a rigorous, cumulative four-part test established under IRC § 41(d).

Statutory Exclusions from Qualified Research
Even if an activity satisfies the four-part test, IRC § 41(d)(4) explicitly excludes several categories of research from credit eligibility. These include:

• Research after Commercial Production: Any research conducted after the beginning of commercial production of the business component.
• Adaptation: Adapting an existing business component to a particular customer’s requirement or need.
• Duplication: Reproducing an existing business component from a physical examination, plans, blueprints, or detailed specifications (reverse engineering).
• Surveys and Studies: Efficiency surveys, management studies, market research, and routine data collection.
• Foreign Research: Research conducted outside the United States, the Commonwealth of Puerto Rico, or any possession of the United States.
• Funded Research: Research to the extent funded by any grant, contract, or otherwise by another person or governmental entity.

Furthermore, software developed primarily for the taxpayer’s internal use is generally excluded unless it meets an additional “high threshold of innovation” test, requiring the software to be highly innovative, entail significant economic risk, and not be commercially available.
Qualified Research Expenses (QREs)
Under IRC § 41(b), taxpayers may claim specific categories of costs as Qualified Research Expenses (QREs). These are limited to:

• In-House Wages: Wages paid to an employee for performing qualified services, which include engaging in qualified research, or the direct supervision or direct support of such research.
• Supplies: Amounts paid for tangible property used in the conduct of qualified research, excluding land, improvements to land, and depreciable property.
• Contract Research Expenses: Generally, 65% of amounts paid by the taxpayer to an outside entity (other than an employee) for the performance of qualified research. This increases to 75% if paid to a qualified research consortium, and 100% if paid to an eligible small business, institution of higher education, or federal laboratory.
• Computer Rental Costs: Amounts paid to another person for the right to use computers in the conduct of qualified research (e.g., cloud computing costs for testing algorithms).

Capitalization versus Expensing: The Impact of Section 174A
A critical evolution in federal R&D tax planning involves the treatment of Research and Experimental (R&E) expenses under IRC § 174. Following the implementation of the Tax Cuts and Jobs Act (TCJA) of 2017, taxpayers were required to capitalize and amortize domestic R&E expenditures over five years (and foreign R&E over 15 years) for tax years beginning after December 31, 2021. This mandate created severe cash flow disruptions for capital-intensive manufacturers and technology firms in Roanoke.

However, the passage of the “One Big Beautiful Bill Act” (OBBBA) in 2025 significantly altered this landscape. The OBBBA enacted a new IRC § 174A, which permanently restores the taxpayer’s ability to immediately expense domestic R&E expenditures for tax years beginning after December 31, 2024. Foreign research remains subject to the strict 15-year amortization rule.

Crucially, the legislation provides transition rules for the interim period. Taxpayers can elect to deduct any remaining unamortized domestic R&E expenses accrued from 2022 through 2024 using two approaches: a full deduction claimed entirely in 2025, or a split deduction (50% in 2025 and 50% in 2026). Additionally, taxpayers designated as “eligible small businesses” in 2025 (average gross receipts under $31 million) may elect to apply §174A retroactively by amending their 2022-2024 tax returns to deduct R&E costs immediately, presenting a massive opportunity for tax refunds. The OBBBA also restores the pre-TCJA rules under IRC § 280C(c), requiring that research expense deductions be reduced by the amount of the R&D credit claimed, or alternatively, allowing the taxpayer to elect a reduced credit (the “haircut” adjustment) to preserve the full deduction.
Enhanced IRS Scrutiny and Form 6765 Overhaul
The IRS exercises intense scrutiny over R&D claims, reflecting an administrative directive to curb perceived abuses and demand contemporaneous substantiation. In 2024, the IRS initiated a comprehensive overhaul of Form 6765 (Credit for Increasing Research Activities), introducing sweeping new qualitative data requirements.

The most significant change is the introduction of “Section G – Business Component Information.” This section requires taxpayers to provide detailed, alphanumeric naming conventions for each business component, specifically categorize the type of software being developed (internal use, non-internal use, dual function), and meticulously allocate wages, supplies, and contract research expenses to each individual business component. Starting with tax year 2026 returns, Section G becomes mandatory for most taxpayers, with exemptions limited primarily to Qualified Small Businesses (QSBs) electing the payroll tax offset, or smaller claimants with total QREs of $1.5 million or less and gross receipts of $50 million or less. This regulatory shift forces taxpayers to abandon high-level project estimates and adopt highly granular, real-time project accounting architectures.
Case Law Precedents Governing Federal Claims
The United States Tax Court has consistently reinforced the necessity of strict adherence to the statutory definitions and evidentiary standards:

• George v. Commissioner (T.C. Memo. 2026-10): The court categorically rejected reconstructed R&D narratives assembled years after the activities occurred. The ruling cemented the principle that the four-part test must be proven through credible, contemporaneous records, such as time-tracking data and test results, rather than ex post facto oral testimonies.
• Little Sandy Coal v. Commissioner (7th Cir. 2023): The appellate court denied R&D credits to a shipbuilding parent company that relied on arbitrary estimates to prove the 80% “substantially all” experimentation threshold. The court reinforced the “shrink-back rule” under Treas. Reg. § 1.41-4(b)(2), dictating that if the overall macro-project (the vessel) fails the four-part test, the taxpayer must shrink the evaluation back to the specific sub-component (e.g., a specific winch or hull design) to locate the qualified research.
• Siemer Milling Co. v. Commissioner (T.C. Memo 2019-37): A food processing company was denied credits because it failed to document a scientific methodology. The court noted the complete absence of formulated hypotheses, modeling, or systematic trial and error, confirming that routine quality control testing does not constitute an eligible process of experimentation.
• Smith v. Commissioner & System Technologies Inc. v. Commissioner (2024/2025): These cases scrutinized the “Funded Research” exclusion. The Tax Court denied IRS summary judgments, ruling that if a taxpayer operating under a fixed-price contract bears the financial risk of failure (i.e., payment is contingent on the success of the research) and retains substantial rights to the research results, the activities are not “funded” and remain credit-eligible.
• Harper v. Commissioner (2023): The court denied an IRS motion for summary judgment against a construction and design-build firm. The IRS argued the firm’s architectural designs failed the business component test. The court rejected this, affirming that designing bespoke buildings and structures intended to discover information useful to the taxpayer’s trade inherently satisfies the business component requirement.

Detailed Analysis: Virginia State R&D Tax Credit Guidelines

The Commonwealth of Virginia’s statutory R&D framework is fundamentally anchored to federal law, explicitly utilizing the definitions of IRC § 41(b) and (d) to determine what constitutes “Virginia qualified research” and “Virginia qualified research and development expenses”. The research must be conducted within the Commonwealth; if research is conducted jointly at facilities inside and outside Virginia, only the wages and expenses strictly apportioned to the Virginia location qualify.
The Dual Credit System: RDC and MRD
Historically, the Virginia Department of Taxation administered two mutually exclusive tax credits to incentivize innovation: the Research and Development Expenses Tax Credit (RDC) and the Major Research and Development Expenses Tax Credit (MRD). A taxpayer cannot claim both credits in the same taxable year.

The Research and Development Expenses Tax Credit (RDC) Established in 2011, the RDC was designed to support small to mid-sized entities. The credit is generally refundable. Taxpayers computing the RDC could elect one of two calculation methods:

• Primary Method: A base credit equal to 15% of the first $300,000 in Virginia qualified R&D expenses (yielding a maximum base credit of $45,000). This percentage escalates to 20% (up to $60,000) if the qualified research was conducted in conjunction with a Virginia public or private college or university.
• Alternative Simplified Method (ASC): A base credit equal to 10% of the difference between the current year’s Virginia qualified R&D expenses and 50% of the average expenses from the three preceding taxable years. If the taxpayer had no expenses in the preceding three years, the credit defaults to 5% of the current year’s expenses. The statutory caps of $45,000 and $60,000 apply equally to this method.

If the total aggregate pool of approved RDC applications statewide fell below the annual legislative funding cap, the Department authorized a “Supplemental Credit” allocating the remaining funds to taxpayers. Under the primary method, this supplemental credit covered 15% (or 20% for university research) of the second $300,000 in qualified expenses.

The Major Research and Development Expenses Tax Credit (MRD) Established in 2016, the MRD was targeted at large-scale industrial and technological enterprises. This is a non-refundable credit that requires a taxpayer to incur Virginia qualified R&D expenses strictly in excess of $5 million for a single taxable year. The MRD credit is calculated as 10% of the difference between the current year’s expenses and 50% of the average Virginia qualified R&D expenses paid or incurred during the three preceding taxable years. Unused MRD credits carry a generous provision allowing them to be carried forward for up to 10 succeeding taxable years.
Ethical Exclusions and Administrative Rigor
A distinct legislative restriction within the Code of Virginia (§ 58.1-439.12:11) involves an ethical exclusion. No tax credit is allowed if the otherwise qualified R&D expenses are paid for or incurred by a taxpayer for research conducted in the Commonwealth on human cells or tissue derived from induced abortions or from stem cells obtained from human embryos. The statute explicitly clarifies that research conducted using non-embryonic (adult) stem cells remains eligible.

The Virginia Department of Taxation administers these programs with uncompromising procedural strictness. Eligible taxpayers must submit detailed applications (Form RDC or Form MRD) by September 1 of the calendar year following the close of the taxable year in which the expenses were incurred. In Virginia Tax Commissioner Ruling 24-73, a corporate taxpayer appealed the denial of its MRD application because it had failed to include employee Social Security Numbers on its wage schedule. Despite providing the missing information in February of the following year, the application was permanently denied. The Commissioner affirmed that because the credits are subject to strict annual legislative caps, the Department must enforce a hard “perfection deadline” of November 15 to process applications and prevent the total issued credits from exceeding the statutory budget cap. Similarly, Ruling 23-10 affirmed the denial of an application received without a postmark on September 8, enforcing the absolute nature of the September 1 filing deadline.
The 2025 Legislative Sunset and Future Outlook
A critical inflection point for businesses operating in Roanoke is the current legislative status of these state-level incentives. In 2024, Governor Glenn Youngkin signed House Bill 1518, which altered the funding pools for the state credits. The aggregate annual cap for the RDC was increased from $7.77 million to $15.77 million, while the MRD cap was simultaneously reduced from $24 million down to $16 million.

However, the statutory language of the Virginia Code dictated that both the RDC and MRD programs possessed “sunset” expiration dates applicable to taxable years beginning on or after January 1, 2025. During the 2025 Regular Session of the Virginia General Assembly, lawmakers introduced HB 1969, an omnibus tax bill designed to extend various expiring sunsets, including both R&D tax credits, through taxable year 2026. Despite broad support from the business and innovation communities, HB 1969 failed to pass from a conference committee prior to legislative adjournment on February 22, 2025.

Consequently, the Commonwealth of Virginia does not offer a state R&D tax credit for the 2025 tax year and beyond. The 2025-2026 state budget formally recognized this expiration, reflecting a $17.5 million increase in assumed state revenues due to the elimination of the MRD and RDC programs.

The second-order implications for Roanoke’s advanced manufacturing and life sciences sectors are profound. Without state-level tax mitigation, the effective cost of conducting research in Virginia has immediately increased. Businesses must now pivot their near-term tax planning strategies entirely toward optimizing the federal IRC § 41 credit. For pre-revenue startups in the Roanoke Innovation Corridor, this heightens the reliance on the federal QSB payroll tax offset. For established manufacturers, the focus shifts to maximizing the newly restored federal immediate expensing of domestic R&E under Section 174A.

Regarding state liabilities, businesses may continue to utilize previously earned MRD credits generated prior to 2025, as the 10-year carryforward provision remains legally valid and unaffected by the program’s sunset. Key regional stakeholders, including the Roanoke Regional Partnership and the Roanoke-Blacksburg Technology Council, are widely expected to aggressively lobby the 2026 General Assembly to pass retroactive legislation reinstating the credits, arguing that their absence severely damages Virginia’s competitiveness in attracting high-tech capital investment against rival states.

Final Thoughts

Roanoke’s economic trajectory from a 19th-century railway nexus to a 21st-century locus for biotechnology, advanced manufacturing, and food sciences is a testament to adaptive regional development. However, the sustained viability of these capital-intensive industries relies heavily on the strategic utilization of Research and Development tax credits.

The intersection of federal and state tax policy currently presents a highly volatile environment for Roanoke innovators. Federally, the permanent restoration of immediate domestic R&E expensing under the OBBBA provides a massive influx of liquidity, alleviating the cash-flow burdens imposed by previous amortization mandates. Yet, the IRS’s aggressive implementation of Form 6765 Section G and a stringent string of Tax Court defeats for poorly documented claims—such as Little Sandy Coal and Siemer Milling—demand that companies completely overhaul their internal accounting systems to capture granular, contemporaneous technical data.

At the state level, the failure of the Virginia General Assembly to extend the RDC and MRD tax credits past the January 1, 2025 sunset places an unexpected financial burden on the local innovation ecosystem. Until legislative action potentially revives the Virginia programs in 2026, Roanoke enterprises must mitigate this loss by maximizing federal payroll tax elections, rigorously analyzing the funded status of their defense contracts, and precisely deploying the “shrink-back” rule to legally optimize and protect their federal claims against intensifying IRS audits.

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.