CPG Brands Overlook R&D Tax Credits in Product Development, K-38 Consulting Explains
RALEIGH, N.C. — September 25, 2026 — Consumer product companies spend heavily on developing new formulations, testing packaging, and improving shelf life — activities that frequently qualify for the federal R&D tax credit under IRC Section 41, yet remain significantly underclaimed across the ecommerce and CPG industries. K-38 Consulting, which provides R&D tax credit services to consumer brand clients, says the gap stems from a persistent misconception that this credit is reserved for pharmaceutical labs and software companies rather than the product development work happening on most CPG and DTC teams every day.
“A brand reformulating a product to hit a specific shelf-life target, or redesigning packaging to reduce damage rates during shipping, is doing exactly the kind of work this credit was built to reward,” said Dallas Alford IV, CPA, Founder of K-38 Consulting. “Most founders in this space have never connected their day-to-day product development work to a tax credit, because they picture something much more clinical than what’s actually required.”
What Qualifies Under the Federal Four-Part Test
The R&D tax credit under IRC Section 41 applies to activity that passes a four-part test: the work must be technological in nature, aimed at developing a new or improved product, process, or formula, involve a genuine process of experimentation to resolve technical uncertainty, and be treated as a research and experimental expense. K-38 Consulting says this definition covers a broad range of activity common in consumer product development:
Formulation and reformulation work. Developing a new product formula, or modifying an existing one to hit a specific shelf-life, texture, or performance target, typically qualifies — including work that removes or substitutes an ingredient while attempting to preserve the product’s original performance.
Packaging engineering. Developing sustainable or recycled packaging materials, optimizing protective packaging to reduce shipping damage rates, and designing lightweight containers that still meet barrier performance requirements are increasingly recognized as qualifying activities.
Shelf-life and sensory testing. Systematic testing to extend a product’s shelf life or improve sensory characteristics — taste, texture, appearance — through a genuine trial-and-error process typically satisfies the experimentation requirement.
Production process improvements. Adapting production or filling processes for a new formula viscosity, reducing production defects, or increasing manufacturing throughput through technical problem-solving can also qualify.
“The key distinction is between simply using an existing, validated formula or process, and actively testing, modifying, or improving one,” Alford said. “White-labeling a contract manufacturer’s proven formula doesn’t qualify. Modifying that formula and testing whether it still performs the same way absolutely can.”
Why the Credit Is More Valuable Than Many Brands Realize
Under the Alternative Simplified Credit method, qualifying research expenses can generate a federal credit worth roughly 14% of qualifying costs above a base amount tied to the company’s prior three-year average spending, or approximately 6% for companies claiming the credit for the first time. Recent federal tax law changes have further increased the credit’s value: the One Big Beautiful Bill Act restored immediate expensing of domestic research costs under a new Section 174A, meaning qualifying brands can now deduct and credit the same research spending in the same year, with retroactive relief available for costs incurred in recent tax years.
“For a consumer brand running tight margins, a credit worth roughly 14% of qualifying product development costs is a meaningful number,” Alford said. “It’s cash that directly offsets the cost of the innovation work brands are already doing to stay competitive.”
Common Reasons Consumer Brands Miss This Credit
K-38 Consulting identifies several recurring reasons ecommerce and CPG brands leave this credit unclaimed:
Assuming the credit requires a formal lab. Most consumer brands don’t operate a dedicated research facility, leading founders to assume their kitchen, pilot line, or contract manufacturer testing doesn’t count — when in fact it frequently does.
Failing to document the experimentation process. A defensible credit claim requires evidence of what was being developed, what technical uncertainty existed, what was tested, and what the results were. For many brands, this evidence already exists informally in batch logs, formulation notes, and supplier correspondence — it simply was never organized with a tax claim in mind.
Overlooking contract research and cloud computing costs. Brands that use external contract manufacturers or testing labs for development work, or that rely on cloud infrastructure for digital product experimentation, frequently miss qualifying expenses in these categories, in addition to internal labor costs.
Not filing for prior open tax years. Companies generally have a three-year window to amend prior returns and claim credits for qualifying work that was never claimed, leaving substantial value uncollected for brands that assume the opportunity has passed.
What K-38 Consulting Recommends
Based on the patterns it sees among ecommerce and CPG clients, K-38 Consulting recommends brands:
• Review recent product development projects against the four-part qualification test, rather than assuming development work doesn’t count because it happened outside a formal lab setting.
• Capture existing documentation with a tax claim in mind. Batch logs, formulation notes, and testing records that already exist for operational reasons can often support a credit claim with minimal additional effort.
• Include packaging and process development in the eligibility review, not just core formulation work, since these are commonly overlooked categories of qualifying activity.
• Account for contract research and cloud computing costs, not just internal labor, when calculating total qualifying research expenses.
• Review the past three years of development work, since brands that never claimed the credit may still be able to amend prior returns and capture previously missed savings.
How K-38 Consulting Supports Ecommerce and CPG Brands
K-38 Consulting’s R&D tax credit services help ecommerce and CPG brands identify and document qualifying product development work, from formulation to packaging engineering, working alongside the firm’s CPG CFO services to turn overlooked tax credits into usable cash flow for growing brands. This work is part of K-38 Consulting’s broader outsourced CFO services, helping consumer brands fund innovation without relying solely on margin or outside financing.
“This is money most brands are already entitled to for work they were doing anyway,” Alford said. “The brands that claim it consistently aren’t doing anything differently in their product development — they’re just capturing the tax value of the innovation they were already investing in.”
About K-38 Consulting
K-38 Consulting provides fractional and outsourced CFO services, controller services, and tax strategy — including R&D tax credit and cost segregation services — to startups and midsize businesses across the country. The firm serves clients in SaaS, biotech, healthcare, law, ecommerce, CPG, construction, and real estate, delivering the financial leadership, forecasting tools, and strategic guidance typically available only to companies with a full in-house finance team. K-38 Consulting is headquartered in Raleigh, North Carolina, with clients nationwide.
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