From Serums to Savings: Unlocking R&D Tax Credits in the Beauty Industry

Every beauty breakthrough begins with the question, “Can we make it better?” Better for skin, better for the planet, better for the people who use it. 

To answer that question, today’s beauty companies are turning to science, experimenting with biotechnology, sustainable materials, and digital tools that are redefining how products are created and delivered.

What many don’t realize is that behind-the-scenes innovation doesn’t just transform the beauty market; it can also unlock significant tax savings. Through the Research and Development (R&D) tax credit, beauty and cosmetics companies can recover a portion of the time, money, and effort spent developing new products and technologies.

What Is the R&D Tax Credit?

The federal R&D tax credit is a government incentive encouraging U.S. companies to invest in innovation. It allows businesses to offset a portion of qualified research expenses (QREs), such as U.S.-based wages, supplies, and contract research.

Many states, including California, New York, Texas, and New Jersey, also offer their own R&D programs to further reward technological breakthroughs. State credits can provide even greater value through refundability, carryforwards, or cash refunds, especially for startups and small-to-midsize beauty brands investing heavily in new product lines.

You don’t need to be a lab-based tech company to qualify. If your work involves experimentation, testing, or developing new formulations or processes, you may be eligible.

How Does the R&D Tax Credit Apply to the Beauty Industry?

The R&D tax credit rewards the science and engineering behind creating effective, reliable, and sustainable beauty products.

Here are often overlooked examples of potentially qualified activities in the beauty and cosmetics industry:

• Product Formulation and Ingredient Innovation: 
  • Developing new skincare formulas, such as peptide complexes, retinol alternatives, or microbiome-friendly products.
  • Experimenting with natural or biotech-derived ingredients to replace synthetics. 
  • Creating hypoallergenic, vegan, or preservative-free formulations that require testing and reformulation.

• Packaging and Sustainability Engineering:
  • Designing eco-friendly or refillable packaging solutions that maintain product stability.
  • Testing new materials for biodegradability, durability, or recyclability.
  • Engineering packaging to extend product shelf life without additives.
• Manufacturing Process Improvements:
  • Developing cleaner or more efficient manufacturing processes to reduce waste or energy use.
  • Automating blending, filling, or production systems.
  • Inventing precision-mixing technologies or AI-driven formulation tools.
• Testing and Prototyping:
  • Conducting stability and efficacy testing on new formulations.
  • Experimenting with production scaling from lab batches to complete manufacturing runs.
• Beauty Tech and Personalization:
  • Creating algorithms or AI tools for personalized skincare or shade-matching.
  • Developing diagnostic devices or mobile apps that analyze skin tone, moisture, or conditions.
  • Building AR/VR “try-on” tools or smart mirrors to enhance customer experience.

These activities can involve technical uncertainty, a key qualifier for the R&D tax credit.

What Costs Can Be Claimed?

The QREs that beauty and cosmetics companies claim often include:

• Wages for employees directly involved in R&D, including chemists, lab technicians, engineers, and product developers.
• Supplies used in experimentation, including ingredients, packaging materials, and lab equipment.
• Contract research, including for scientific consulting, software development, or third-party testing.

These costs can add up quickly, so recovering a portion of them through R&D credits can measurably impact profitability and reinvestment.

Why Should Beauty Companies Claim the R&D Tax Credit?

For the beauty and cosmetics industry, the R&D tax credit is more than just a financial incentive. By leveraging this credit, companies can:

• Improve Cash Flow: Offset tax liability or even receive cash refunds, strengthening financial flexibility.
• Accelerate Growth: Support expansion into new markets and categories.
• Enhance Competitiveness: Stay ahead of fast-moving trends in clean beauty, biotechnology, and skin-type customization.
• Reinvest in Innovation: Free up capital to fund future product development and sustainability initiatives.

Is Your Beauty Brand Eligible?

To find out if your R&D activities and expenses may qualify, apply the IRS’ four-part test:

• New or Improved: Are you developing or improving a product, process, formula, or software?
• Technological in Nature: Is your work based on scientific principles: biology, chemistry, engineering, or computer science?
• Elimination of Uncertainty: Are you unsure how to achieve the desired outcome at the start?
• Process of Experimentation: Are you testing, analyzing, or refining solutions through trials or prototyping?

If you answered yes to these questions, your R&D may qualify, and your business could be sitting on a wealth of untapped tax savings.

The Bottom Line

From ingredient discovery to packaging innovation, the beauty industry is full of R&D activities that may qualify for the R&D tax credit. Whether you’re a global cosmetics manufacturer or an indie skincare startup, claiming these credits can help you reinvest in creativity, sustainability, and future growth.

In a world where beauty and science increasingly intersect, the R&D tax credit ensures your innovations don’t just look good. They pay off.

Next Steps

Let's build a strategic tax plan together. To get started, schedule a free consultation with Randy Eickhoff, CPA, Acena Consulting's Founder & Head Coach.

Register for our free monthly webinar, next on Nov. 18, 2025: Cracking the (Tax) Code for R&D.

• This workshop provides one CPE credit for professionals who are keeping up with continuing education.
• Learn more about qualifying and documenting R&D activities for tax incentives.

Visit our Acena Events page to sign up for our newsletter and stay abreast of all upcoming events.

Follow Acena on LinkedIn and X for the latest industry-specific incentives and tax policy updates.

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Photo courtesy of Dominique Godbout on Flickr.