The transportation industry has undergone many innovative changes in the last several decades. Transportation companies can capitalize on their research and development (R&D) efforts by claiming R&D tax credits. R&D tax credits are federal dollar-for-dollar tax incentives created by the federal government in 1981 to spur innovation and increase tech job creation.
Transportation companies can be excellent candidates for R&D tax credits. They perform several routine activities that make them eligible for tax credits, including improving safety features, energy efficiency, sensors, implementing AI, and redesigning vehicles for improved performance.
Qualifying for R&D tax credit
To qualify for R&D tax credits, transportation companies must prove to the IRS that they are performing R&D activities. Documenting all qualifying research activities (QRA), qualifying research expenses, and employee job titles are necessary to create an application that can successfully claim R&D tax credits. Research and development must involve improving a business component with a technical process, eliminating uncertainty, and an experimental procedure.
Another aspect to consider when filing an R&D tax credit claim is qualifying research expenses (QREs). QREs include employee wages and salaries, research and development-related expenditures, and contract research expenses.
Once you have gathered all necessary documentation, you must complete Form 6765. Form 6765 is the IRS form businesses must fill out to make an R&D tax credit claim. When completing the form, you must select either the Regular research credit calculation method or the Alternative simplified credit.
The regular research method allows businesses a 20% credit of all QREs. However, the regular method may not be available to newer companies, as it requires gross receipts from the past three years to qualify. New businesses can opt for the simplified credit, which only evaluates qualifying research expenses over the past three years, making it more accessible and easier to claim. However, the simplified calculation method provides a lower percentage of credit.
In addition to federal-level R&D tax credits, companies in many states can qualify for state-level R&D tax credits. All R&D tax credits require organizations to conduct QRAs in the corresponding jurisdiction (i.e., to qualify for federal tax credits, research and development activities must be performed in the U.S.).
Safety features are an essential aspect for every transportation company to invest in. These safety features require extensive testing, and companies generally document the development process. Transportation companies can qualify for R&D tax credits by improving airbags, traction control, stability control, seatbelts, and more.
Since the federal government mandates these safety features, all transportation companies can claim R&D tax credits for making vehicles safer. Improving safety features is considered a QRA and has a good chance of being approved by the IRS.
Vehicles have sensors that help detect speed, engine condition, temperature, oxygen, and more. Improving vehicle sensors is an important aspect of any transportation organization’s operations that can lead to better performance and customer satisfaction.
Qualifying research activities do not need to be successful; they need only to attempt to improve the business component. During development, engineers use simulation to test multiple sensor configurations across various operating scenarios. Businesses should document the entire process to create a successful R&D tax credit claim, including successful and unsuccessful steps.
Artificial intelligence (AI) is a relatively recent technology that transportation companies can utilize to improve their vehicles. Some up-and-coming AI developments include self-driving cars, driver assistance, and automated delivery. These features can help businesses save money in the long run and can qualify for R&D tax credits.
Implementing AI requires teams to be familiar with machine learning technologies and algorithms to successfully create a product. Transportation companies that invest in AI gain access to additional QRAs and methods of improving their vehicles.
Designing energy-efficient products
Creating more energy-efficient vehicles, such as flexible-fuel and zero-emission vehicles, can result in fewer emissions and cost savings on fuel. In addition, organizations can implement eco-friendly features in their products, such as LED lighting, eco-mode air-conditioning, and lightweight design.
Transportation companies can claim R&D tax credits for their efforts by incorporating sustainability into their business models. Furthermore, activities intended to make products more environmentally friendly are considered QRAs and will likely be approved by the IRS.
Redesigning vehicles for improved performance
Organizations must consistently refine and redesign their vehicles to remain competitive in the transportation industry. Redesigns can help vehicles operate more safely and efficiently and last longer. Fortunately, the IRS generally considers vehicle redesigns and improvements QRAS; all associated costs may be qualifying research expenses.
Capitalizing on the newest improvements in the transportation industry is an excellent way for companies to reduce their tax burden. However, finding out how to claim R&D tax credits can be challenging. MainStreet passes on tax savings to businesses by analyzing their research and development activity to help them claim credits they qualify for. You can contact us to get started today.