The “behind the scenes” stars of the newest automotive innovations

This week, the 2018 North American International Auto Show kicked off in Detroit.

It’s an exciting time for all major auto makers, who get to show off their latest and greatest automobiles and automotive technologies to a global audience of automotive engineers, designers, industry thought leaders, journalists and car aficionados. And of course, it’s the time where the top auto makers have the opportunity to introduce new products and compete for industry awards and customer attention.

Less visible though in all the hustle and bustle are the “little guys;” the Tier 1 and Tier 2 automotive suppliers whose work behind the scenes to help make these exciting new vehicles possible.

There are a lot of little guys out there

In the U.S. alone, there are estimated to be thousands of Tier I and Tier 2 automotive suppliers, who work either as direct or indirect suppliers to Original Equipment Manufacturers (OEMs). Moreover, much of the research and development experimentation efforts required to design and build new or improved components for future vehicle platforms falls to these suppliers.

Examples could include anything from improvements to a vehicle’s fuel or electrical systems to improved audio and infotainment systems, to the development of new interior or exterior components such as seating, mirrors, lighting and windshield wiper systems.

Many don’t know they’re eligible for the R&D Credit

Unfortunately, many Tier 1 and Tier 2 automotive suppliers fail to realize that the efforts they are undertaking to design, develop and manufacture these new automotive systems and components will often qualify for the IRC Sec. 41 Research & Development Tax Credit.

In fact, we at Tax Credits Group have worked with several U.S. based Tier 1 and Tier 2 automotive suppliers who had failed to take advantage of this incentive. Some of their reasons included:

  • Being unaware that that the credit existed
  • Misinterpreting the rules and requirements of the credit, thus believing their efforts would not qualify as R&D
  • Concluding that foreign ownership would disqualify them from claiming the incentive. (*Note, as long as the effort is taking place on U.S. soil, even companies with foreign-owned parents can qualify for the incentive.)

These suppliers are not alone in their thinking, which is unfortunate, as the R&D credit is a powerful (and permanent tool ) for obtaining a dollar-for-dollar reduction to a tax liability, thus increasing cash flow and operating capital year after year.

Redefining the concept of R&D

In reality, a great deal of what automotive suppliers undertake to develop new or improved components and systems is eligible for the R&D credit.

Weight-reduction projects and experimentation with alternative fuels to meet the increasingly strict requirements from OEMs (who are themselves facing tighter and more stringent mandates) likely qualifies as R&D. So will most work suppliers do alongside OEMs to fight global competition in areas such as electronic and autonomous vehicle development.

Further, many of the development efforts that suppliers consider to be “routine and ordinary” can and often will qualify for the R&D credit. Here are just a few examples of development activities that are typically considered to be qualifying for the research credit:

  • Developing new or improved products, processes, techniques or formulas
  • Developing and evaluating the technical feasibility of new concepts or hypotheses
  • Research and evaluation into new technologies or technological alternatives
  • Utilizing CAD modeling or software simulation tools to aid in new or improved product design
  • Developing new or improved prototypes, prototype equipment and/or experimental products
  • Undergoing trial and error and/or systematic testing and validation of new or improved products or processes

As you can see, many of these activities are common efforts undertaken by suppliers on a daily basis.

Ready to learn more

As we celebrate the latest and greatest automotive technology at this year’s auto show, we haven’t forgotten about the little guys in the background who help to make it all possible. So, if you are a Tier I or Tier 2 supplier wondering if your work qualifies for the R&D credit, contact us today for a free consultation.

About the Author: Michael Krajcer

Michael Krajcer, JD, CPA, is founder and President of TCG. He has spent his entire 35 year career working with the Research and Development Tax Credit. This includes a decade of experience auditing businesses who claimed it, and over 20 years of experience helping U.S. companies navigate through it. He has also resolved dozens of IRS and state audits of credit claims.