United States

Strategies to maximize R&D for automotive companies

INSIGHT ARTICLE  | 

Automotive companies can be eligible to claim research and development tax credits for a varying array of activities. In the automotive industry, some supply expenses may be overlooked. R&D expenses such as the wages paid to development employees, supplies consumed in the research and payments to third parties assisting with the research should be reviewed as part of an R&D credit study. Such a credit study helps determine which of those expenses can qualify for inclusion in an R&D credit claim.

Automotive manufacturers and suppliers also have a unique opportunity to increase their R&D credit by considering an underutilized provision associated with tooling costs. These new tooling costs may be claimed in addition to other qualified supply expenses resulting from new product development, product improvement and process improvements. The inclusion of tooling costs has the potential to greatly increase an R&D credit.

Generally speaking, taxpayers may benefit from this position if they bear the economic risk that the tooling will perform adequately and ownership of the tool has been transferred to the customer. This position was effectively created by a 2009 U.S. tax court decision, TG Missouri Corporation v. Commissioner, 133 T.C. 278 ( T.C. 2009), which held that a manufacturer of automotive parts may categorize the cost of tooling developed for the manufacture of parts as an R&D supply expense when the proper conditions are met.

Significantly, this same position was recently conceded by the IRS in another case that reached the U.S. tax court in 2018, with the taxpayer TSK of America Inc. Because the recent case did not go to trial, it does not carry the same weight as the previous case. It does, however, give insight to taxpayers’ ability to continue claiming these significant tooling expenses in their R&D credits.

This area has long been a contentious issue for automakers, as tooling is often a significant expense for automotive and automotive-component manufacturers. The ability to include this significant expense into the R&D credit therefore can create a tremendous benefit.


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