The automotive industry is evolving faster than ever, driven by breakthroughs in autonomous driving, electric vehicles, and sustainable manufacturing. As companies invest heavily in research and development (R&D) to stay competitive, rising costs can strain innovation budgets. 

Amid these challenges, federal and state R&D tax credits offer a valuable financial tool that can help auto industry companies handle expenses and reinvest in the technologies that will define the future of transportation.

What are R&D Tax Credits?

R&D tax credits are government incentives designed to encourage companies to invest in innovation. They are available at both federal and state levels and are meant to offset costs associated with qualified research activities (QRAs). These activities typically include developing new products, improving existing technologies, prototyping, testing, and experimenting with materials or processes.

Eligible projects in the automotive sector may include:

• Advanced Systems and Software:
  • Creating vehicle-to-vehicle (V2V) and vehicle-to-infrastructure (V2I) communication systems.
  • Designing vehicle software for cybersecurity or predictive maintenance.
  • Developing race-focused engine management and tuning software.
  • Modeling autonomous vehicle software and sensors.
• Engines, Powertrains, and Components:

• • Constructing electric drivetrains or battery technologies.
  • Evaluating fuel cell technologies and hydrogen-powered vehicles.
  • Fabricating advanced tires or traction systems for performance and safety.
  • Improving engine efficiency and emissions reduction systems.
  • Innovating energy recovery systems, including kinetic energy recovery systems (KERS).
  • Making high-precision braking systems, including regenerative or carbon-ceramic brakes.
  • Prototyping hybrid or alternative fuel powertrains.
  • Upgrading advanced suspension and handling systems for track performance.

• Manufacturing & Materials:

• • Refining manufacturing techniques for robotic assembly or 3D-printing components.
  • Engineering lightweight materials to improve fuel efficiency.
  • Optimizing aerodynamics through computational fluid dynamics (CFD) wind-tunnel testing.

Federal R&D Tax Credits

The federal Research credit (i.e., the R&D tax credit), established under 26 U.S. Code § 41 of the Internal Revenue Code (IRS), allows businesses to claim a credit for qualified research expenditures (QREs), including wages, supplies, and contract research costs.

The federal credit can be particularly valuable for startups and small businesses. It can be applied against income and potentially payroll tax obligations of profitable or pre-revenue companies.

State R&D Tax Credits

Many states also offer R&D incentives, which can be claimed in addition to the federal credit. States with significant automotive sectors like California, Michigan, and Ohio provide R&D credits to support innovation in sectors such as electric vehicle infrastructure, emissions reduction technologies, and smart manufacturing systems.

State credits can offer additional benefits, including:

• Carryforward options for companies unable to use the full credit in a given year.
• Refundable credits that provide immediate cash flow for smaller companies.
• Targeted incentives for industries or technologies that align with state economic priorities.

How Can R&D Credits Benefit My Automotive Business?

R&D tax credits are a strategic advantage for automotive businesses. By offsetting a portion of R&D expenses, companies can:

• Boost Competitive Positioning:
  • Companies leveraging R&D credits can develop cutting-edge products more efficiently and gain a competitive edge in increasingly tech-driven markets.
• Improve Cash Flow:
  • Credits reduce tax liability and, in some cases, provide refundable cash payments, which can be crucial for capital-intensive automotive projects.
• Increase Innovation: 
  • Freed-up resources can be reinvested in further technological advancements, faster product development, or expansion into new markets.

• Meet Long-Term Sustainability Goals:
  • Funding innovation in clean energy, electric vehicle (EV) technology, or emissions reduction helps meet customer demand for sustainable solutions.

Federal and state R&D tax credits represent a powerful incentive for automotive companies. By effectively leveraging these credits, businesses can reduce costs, improve cash flow, and accelerate the development of cutting-edge technologies. In a sector defined by rapid transformation, R&D credits provide both financial relief and a strategic tool to drive sustainable growth and industry leadership.

Next Steps

Schedule a free consultation with Randy Eickhoff, CPA, Acena’s Founder & Head Coach, for immediate assistance. We will help you plan strategically to get the most out of your taxes.

Register for our free monthly webinar, next on September 16th: Cracking the (Tax) Code for R&D.

• This workshop provides one CPE credit for professionals who are keeping up with continuing education.
• Learn more about qualifying and documenting R&D activities for 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 updates on industry-specific incentives and tax policy.

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