Every supplement and beauty founder has heard some version of the pitch: your formulation work is research, research earns a tax credit, and a firm will find you six figures for a fee. Some of that is true. The honest math is narrower than the pitch, and 2026 changed it in two ways worth knowing before you sign anything.
The direct answer: the credit is real but modest, roughly 8% to 10% of the US wages, contractor spend, and supplies that genuinely go into developing or improving a product. Formulation, reformulation, stability work, and new delivery formats can qualify. Flavor panels, packaging looks, and anything your overseas co-manufacturer's chemist did for you do not. And the deduction rules changed again, so what you spent on this work is treated differently than it was in 2023.
What changed in 2025 and 2026
For tax years beginning after December 31, 2024, domestic research costs are deductible in the year you spend them again, under new Section 174A. From 2022 through 2024 you had to spread them over five years, which is why so many brands paid tax on profit they did not feel. The IRS summary of the One Big Beautiful Bill provisions covers the change.
Two catches. Research done outside the United States still gets spread over 15 years, so formulation paid to a lab in Korea or a co-packer's team in Mexico is deducted slowly no matter what. And the special window for smaller businesses to apply the new rule back to 2022 through 2024 closed on July 6. Costs from those years that are still sitting unamortized can generally be deducted on the 2025 and 2026 returns instead; ask your preparer which schedule applies to you.
States are not all along for the ride. Florida decoupled from the new rule on August 3, and other states follow their own conformity dates, so a federal deduction can become a state add-back.
What counts, in your business
The credit tests whether you tried to eliminate a technical uncertainty through a process of experimentation, using the hard sciences. In a supplement or beauty brand, that tends to look like:
- developing a new formula where the outcome was genuinely uncertain, not a line extension with a new scent;
- reformulating to hit a shelf-life, stability, or dissolution target, including the rounds that failed;
- moving a product into a new format, such as a gummy, a stick pack, or a ready-to-drink can, where the process had to be worked out;
- reformulating because a regulation forced it, such as removing an ingredient a state banned or replacing one that no longer clears a self-affirmed GRAS position, when the replacement required real testing.
What does not count: consumer taste panels, packaging design, label copy, routine quality control on finished lots, market research, and the co-manufacturer's own development work when they, not you, carried the cost and the risk.
The spend that counts is US wages for the people doing the work, 65% of what you pay US contractors for it, and supplies consumed in testing. Not the finished inventory, not the equipment, not the marketing launch.
The honest math
As an illustration only: a brand with one in-house formulator at $120,000, a part-time US chemist billed at $60,000, and $40,000 of test batches and lab fees has roughly $180,000 of qualified spend after the contractor haircut. At the rates most brands land on, that is a credit somewhere between $14,000 and $18,000. Real money, and it repeats every year the work continues. Not the six figures in the pitch.
Now the version we see more often: the formulation was done by the co-manufacturer's team, the founder's time was mostly sales and marketing, and the only US spend was $35,000 of testing. That credit is a few thousand dollars, and a formal study to document it would cost more than it returns.
That is the decision rule. When the qualified spend is in the low hundreds of thousands, the documentation is a spreadsheet of who worked on what, a folder of test results, and Form 6765 prepared with your return. A formal study earns its fee when the credit approaches six figures or more, or when you plan to claim several open years at once.
Four things to settle before year-end
- List every product project from 2025 and 2026 and mark which ones involved technical uncertainty and testing, not just new scents or sizes.
- Separate US spend from foreign spend on those projects. The deduction timing and the credit both turn on that line.
- Get the co-manufacturer's development invoices and contracts in one place. Who bore the cost and the risk decides whose research it was.
- Check your state. A state that decoupled needs its own calculation, and some states have their own credits worth more than the federal one.
Where your facts change the answer
Whether a project meets the test is a facts question, and the IRS has grown more demanding about documentation. Start-ups under $5 million in receipts can use the credit against payroll tax, which most brands at your size no longer qualify for. And if you have unamortized 2022 to 2024 costs, the Section 174 refund window we wrote about in April is now closed for most small businesses, which changes the strategy to catching up on the current return.
If your product development is real and you have never had someone separate the qualifying spend from the rest, that is a tax planning exercise that pays for itself in an afternoon. If a firm promises a six-figure credit before asking where your chemist sits, that is a sales call.
Reading about taxes usually means paying too much of them.
Over 90% of the time our tax advisors find savings a previous CPA missed — for brands with $150K+ in net profit, a typical first-year plan uncovers $20K–$50K. Grab the free Tax Savings Checklist, browse the tax strategy playbook, or start with a zero-cost planning session.