Automobile and Aerospace & Defense

Though many companies in the Automobile and Aerospace & Defense industries qualify for the R&D Tax Credit, the vast majority of those companies are unaware that their daily activities could be generating additional tax savings. Below are some examples of activities that qualify for the Research & Development Tax Credit, including an explanation of how we analyze the activities of such companies to help establish our calculations.

Four-Part Test

In determining whether an activity qualifies as Research and Development for tax credit purposes, the IRS has put together a list of criteria that must be met. This list is commonly referred to as the “four-part test.” The four-part test is as follows:

  • Permitted Purpose – the activity is intended to result in a new or improved product or process (must be improving the functionality, performance, reliability, or quality)

  • Technological in Nature – the activity must rely on the principles of physical or biological science, engineering, or computer science

  • Technical Uncertainty – at the beginning of the activity, the taxpayer must be uncertain as to capability, method, or design

  • Process of Experimentation – the taxpayer must evaluate one or more alternatives to eliminate technical uncertainty (e.g., modeling, simulation, or systematic trial and error)

Additionally, anyone who is actively performing, supervising, or supporting an activity that meets all four parts will have qualifying R&D time. That qualifying time is then added into calculating the R&D tax credit.

Qualifying Activities

Many different common activities qualify as R&D for tax credit purposes in Automobile and Aerospace & Defense businesses. Companies that design, develop, and test new or improved prototypes, batteries, transmissions, airbags, brakes, tires, and vehicle bodies or product integrations in aircraft, including galleys, seats, in-flight entertainment options, and plans for aircraft component construction qualify for the R&D Tax Credit.  Whenever your company experiments with or tests new automotive or aerospace parts while meeting applicable regulatory safety requirements or improves existing parts regarding performance or reliability, R&D is occurring. Utilizing CAD, modeling, and simulation of new or improved parts or sequencing/resequencing operations to increase production and decrease cycle times also support the R&D process. Other qualifying activities include:

  • Developing new or improved manufacturing processes or automating existing processes

  • Developing new, or improving existing, techniques for metal forming, welding, and machining

  • Developing new machines, fixtures, and tools for manufacturing and production

  • Developing new composite materials, procedures for heat-treatment, and components

Time spent directly performing, supporting, or supervising these activities also qualifies as R&D time.  Throughout the course of an R&D study, Adams Consulting works with your company to identify your qualifying activities.

Qualifying Titles

While job titles are not always indicative of an employee’s job duties, the IRS does recognize a number of titles in relation to qualifying activities. In the Automobile and Aerospace & Defense industries, some examples of such titles include:

  • Aerospace Engineer

  • Automotive Engineer

  • Brake Specialist

  • CAD Designer

  • Chemical Engineer

  • Engineering Manager/Director

  • Mechanical Engineer

  • Production Engineer/Supervisor

  • Project Manager

  • Systems Engineer

  • Software Engineer

  • Structural Engineer

Non-qualifying Activities and Titles

Some activities and titles do not typically qualify for the R&D tax credit. Examples of non-qualifying activities are:

  • Adaptation or duplication of existing business components to meet a particular customer’s requirements

  • Research that is wholly funded by grant or contract

  • Research conducted outside the United States

  • Research related to style, taste, cosmetic, or seasonal design factors

  • Research in the social sciences, art, or humanities

  • Surveys (e.g., efficiency surveys, management surveys, market research, routine data collection, and routine quality control)

Examples of titles not usually associated with R&D qualifying activities would be:

  • HR

  • Purchasing

  • Marketing

  • Other soft-science related areas

Adams Consulting works with your company to identify which employees and activities are qualifying for the R&D Credit. We then thoroughly document those activities and the functions of those individuals involved as part of the R&D study.