Innovation has always been at the heart of the aerospace sector, from new material composites and advanced manufacturing techniques to avionics and propulsion systems. Yet, many aerospace businesses don’t realize that their engineering and technical work may qualify for powerful government incentives: Research and Development (R&D) tax credits.

These tax credits can provide significant tax savings to help fund future innovation, support growth, and improve profitability. Let’s explore how aerospace companies may benefit.

What Are R&D Tax Credits?

The federal Research and Development (R&D) tax credit – formally known as the Research credit – is a U.S. federal incentive that rewards companies for developing new or improved products, processes, technologies, formulas, or techniques. Available to fields based on hard sciences, the credit is available to engineering industries, including those in avionics, defense, and space manufacturing.

In addition to the federal program, many U.S. states offer their own R&D tax programs. These state incentives can significantly increase total savings by allowing aerospace businesses to offset state tax liabilities.

U.S. aerospace businesses can apply for R&D tax programs separately in each qualifying state where their R&D operations are conducted to maximize the total financial advantage.

California, New York, Texas, and Massachusetts, in particular, are home to some of the nation's largest state R&D tax programs.

How Does the Aerospace Industry Qualify?

Aerospace businesses engage in R&D more often than they think. Key qualifying activities include:

• Developing New Materials or Composites:
  • Experimenting with new materials – such as lightweight carbon fiber composites, heat-resistant ceramics, or specialized alloys – involves technical testing and stress analysis, and these activities often qualify for R&D tax credits.
• Improving Manufacturing Processes:
  • Creating more efficient or optimized production methods, such as subtractive manufacturing of critical components, automated guidance systems for robotics, or precision welding techniques, may meet the Internal Revenue Service's (IRS') definition of R&D.
• Designing Functional or Performance Components:
  • If your team develops parts with enhanced performance features, such as thrust efficiency, structural integrity under extreme G-forces, or temperature regulation, the underlying design and testing may qualify.
• Developing New Coatings or Finishes:
  • Experimentation with specialized coatings for radar stealth, corrosion resistance, or thermal insulation is another common area of qualifying R&D.
• Developing New Software Tools:
  • The custom development of aerospace technology, like Computational Fluid Dynamics (CFD) tools, flight control algorithms, or real-time telemetry tracking systems, may also be considered qualifying innovation.

What Costs Can Be Claimed?

Aerospace companies can claim a variety of costs associated with qualifying R&D activities, including:

• Employee wages for system designers, engineers, or technicians involved in experimentation and testing.
• Raw materials and prototypes consumed during development.
• Cloud-hosting dedicated to development and software for system design, finite element Analysis (FEA), or simulation.
• Third-party costs of U.S. contractors for external testing or development work.

These qualifying expenses can lead to significant tax savings or even cash refunds, depending on your business structure and profitability.

What are the Benefits for the Aerospace Business?

By leveraging R&D tax credits, aerospace businesses can:

• Recover up to 10-20% (or more) of qualifying development costs.
• Reinvest savings into new component lines, advanced simulation tools, or engineering talent.
• Improve cash flow and profitability.
• Strengthen competitiveness in a fast-moving, high-stakes market.

Innovation is the fuel that propels the aerospace industry forward. Whether you’re designing new structural alloys, refining mission-critical software, or developing advanced manufacturing processes, you could be eligible for valuable R&D tax credits.

By recognizing your technical and engineering efforts as innovation, you can turn your next development phase into not only a successful deployment, but also a tax-saving opportunity.

Connect, Learn, and Maximize R&D Tax Credits

Let's build a strategic tax plan together. Schedule a complimentary R&D consultation with Randy Eickhoff, CPA, Acena Consulting's Founder & Head Coach.

Register for our free monthly webinar, next on Jan. 20, 2026: Cracking the (Tax) Code for R&D.

• This workshop provides one continuing education (CPE) credit for professionals maintaining their continuing education (CEs).
• Discover more about qualifying and documenting R&D activities to receive tax incentives.

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