Fashion Meets Finance: How R&D Tax Credits Reward Innovation in Style

Innovation has always been at the heart of fashion, from new materials and sustainable textiles to digital design and advanced manufacturing techniques. Yet, many fashion businesses don’t realize that their creative and technical work may qualify for powerful government incentives: Research and Development (R&D) tax credits.

This credit can provide significant tax savings to help fund future innovation, support growth, and improve profitability. Let’s explore how fashion 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. Offered to fields based on hard sciences, the credit can be claimed by engineering industries, including those in fashion, textiles, and apparel 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 fashion businesses to offset state tax liabilities.

U.S. fashion 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, Massachusetts, and Texas, in particular, are home to some of the nation's largest state R&D tax programs.

How Does the Fashion Industry Qualify?

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

• Developing New Materials or Fabrics:
  • Experimenting with new textiles – such as eco-friendly fibers, moisture-wicking materials, or biodegradable fabrics – involves technical testing and process refinement, and these activities often qualify for R&D tax credits.
• Improving Manufacturing Processes:
  • Creating more efficient or sustainable production methods, such as digital printing, 3D knitting, or automated pattern cutting, may meet the Internal Revenue Service's (IRS') definition of R&D.
• Designing Functional or Technical Apparel:
  • If your team develops clothing with enhanced performance features, such as temperature regulation, water resistance, or compression technology, the underlying design and testing may qualify.
• Developing New Dyes or Finishes:
  • Experimentation with dye formulations, eco-friendly finishing methods, or colorfast techniques is another common area of qualifying R&D.
• Developing New Digital Tools:
  • The custom development of fashion tech, like virtual fitting software, 3D modeling platforms, or supply chain tracking systems, may also be considered qualifying innovation.

What Costs Can Be Claimed?

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

• Employee wages for designers, technicians, or engineers involved in experimentation.
• Raw materials and prototypes for use in testing.
• Software and digital tools for 3D modeling, pattern making, or simulations.
• 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 Fashion Business?

By leveraging R&D tax credits, fashion brands can:

• Recover up to 10–20% (or greater) of qualifying development costs.
• Reinvest savings into new collections, sustainable initiatives, or digital transformation.
• Improve cash flow and profitability.
• Strengthen competitiveness in a fast-moving market

Innovation is the thread that holds the fashion industry together. Whether you’re designing sustainable fabrics, refining your supply chain, or developing digital fashion tools, you could be eligible for valuable R&D tax credits.

By recognizing your technical and creative efforts as innovation, you can turn your next collection into not just a success story, but also a tax-saving opportunity.

How Do I Get Started?

Don't leave money on the table. Connect with Randy Eickhoff, CPA, Acena Consulting's Founder & Head Coach, for a complimentary R&D consultation to get the most out of your taxes.

Register for our free monthly webinar, next on Nov. 18, 2025: 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.

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.

//

Edited by Laura Whittenburg, MSBME, Sr. Technical Writer at Acena Consulting. Photo courtesy of Art Comments on Flickr.