Automobile Industry Qualifying Activities

There’s no question that the automobile industry spends billions of dollars a year to create new products and perfect existing ones through research and development (R&D). But if you’re a member of the auto industry (or a CPA firm with automobile clients), did you know that both federal and state R&D tax credits could reward you for fostering technological innovation in the U.S.

This tax credit is designed to keep the U.S. a world leader in innovation. They were created by Congress in 1981 to reimburse companies that pursue technological advance via research and development projects. Offered by the federal government and 35 states, the credit rewards these companies with a substantial tax credit they can use to offset future tax liability, expand factory capacity, acquire new employees, or finance future R&D ventures.

How R&D Could Drive Your Future

In recent years, the auto industry has been whipsawed by an industry downturn and the demand to create next-generation vehicles—those with up-to-the-minute digital features and powered by alternative energy sources. As a result, today’s cars are more high-tech than ever. On top of this, the COVID pandemic has shut down plants and closed offices, and automakers are challenged by the need to cut costs while boosting efficiency.

This situation demands R&D activities to meet these special circumstances. As a result, your R&D dollars (and how you use them) are more important than ever, and tax credits can be valuable way to free up your working capital.

Examples of Qualified Activities

Since the days of Henry Ford and the Model T, the automobile industry has been based on technological research and improvement. Today’s vehicles are showcases of computer-based, high-tech components, so any research based on that premise would definitely qualify.

Here are some examples:

• Creating prototypes of new models, automotive parts, or accessories through designing, building, and testing
• Creating new designs of manufacturing equipment and tooling
• Developing self-driving cars
• Improving manufacturing equipment and tooling
• Implementing computer technology to perfect or enhance existing models or parts, possibly via three-dimensional modeling
• Making manufacturing operations more efficient
• Testing for quality assurance
• Testing alternative materials
• Upgrading current parts to improve product performance
• Testing cars and parts to comply with regulations and safety guidelines
• Enhancing the safety of the environment or employees