Aviation R&D Tax Credit Benefits for Businesses

Aviation and the R&D Tax Credit

Small businesses in the aviation sector can leverage the R&D Tax Credit to reduce tax liability and reinvest savings into innovation, such as developing new aircraft components or improving fuel efficiency. Qualifying R&D expenses, including wages, supplies, and contractor costs, can generate significant credits. Additionally, startups and early-stage businesses can benefit from the R&D tax credit payroll offset, allowing them to apply up to $500,000 per year in credits against payroll taxes for up to five years. This helps offset personnel costs, freeing up capital for hiring, prototyping, and further research—critical elements for growth in a competitive industry.

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Founded in 1984 by J.W. Norris under the name Reed & Co., Swanson Reed has grown to become one of the world’s largest firms specializing in Research and Development (R&S) tax credit consulting. We boast numerous publications. Our AI software, TaxTrex, is a cutting-edge language model capable of preparing R&D tax credit claims in just 90 minutes. Our audit insurance policy for R&D credits, creditARMOR, is one of the most cost-effective audit management products on the market.

If you have questions or require further assistance, please call or email our CEO, Damian Smyth, at (000) 000-0000. Feel free to book a short conference call with one of our national R&D tax credit specialists at a time that suits you.

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Case Study: Aviation

Business Scenario

Airtime Helicopters (Airtime) was founded in 2008 to provide charter services, scenic flights, and aerial photography.

Airtime identified a need to further improve the recording quality and stability of its current camera unit to increase clarity and visibility during vertical monochromatic imaging, mapping, and surveying. In 2009, Airtime initiated an R&D project dedicated to the development and design of an accessory camera that would provide helicopter camera crews with unprecedented levels of equipment reliability for use in mapping and imaging applications.

Airtime engaged in a program of systematic, investigative, and experimental activities to overcome significant technical uncertainty and develop new knowledge regarding the impact of specific variables on the effectiveness of the new accessory design.

After experimentation, Airtime needed to determine the eligibility of its proposed R&D activities to see if they qualified for the Research and Experimentation Tax Credit. To be eligible, Airtime needed to be certain that its “qualified research” met four main criteria, known and developed by Congress as the Four-Part Test. After a self-assessment, Airtime conducted the following R&D activities.

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Airtime’s Eligible R&D Activities

Design and development of a series of prototypes to achieve technical objectives and prove the hypothesis (design and development of a camera for mapping and surveying purposes).

Airtime conducted the design and development of spring settings on specific camera types, as well as design considerations regarding the impact of different wind conditions. Airtime believed its camera solution could be achieved by conducting the following activities to reduce unit vibration:

A series of information was gathered and evaluated to identify knowledge gaps and achieve technical objectives.
A series of design experiments was undertaken to prove the hypothesis.
A series of test data was analyzed and evaluated to obtain satisfactory reproducible results.
A series of developments and modifications was undertaken to interpret algorithm data and draw conclusions that served as a starting point for the new design hypothesis.

Background research to assess current knowledge gaps and determine feasibility (background research for the mapping and surveying camera unit).

The following background research was conducted by Airtime:

Literature research and review
Consultation with industry professionals and potential clients to determine the level of interest and commercial feasibility of such a project
Preliminary review of equipment and resources regarding capacity, performance, and suitability for the project

Airtime’s background research qualified as R&D because it helped identify key project elements.

Ongoing analysis of customer or user feedback to improve prototype design (R&D on feedback for the camera and its mapping and surveying capabilities).

Airtime conducted the following R&D activities during this experimentation phase:
Ongoing analysis and testing to improve project efficiency
Commercial analysis and functionality review

These activities qualified as R&D because they were necessary to evaluate the performance capabilities of the new design developed in the field and to improve any imperfections.

Live Webinar: R&D Tax Credit in Aviation, Aerospace and Space Technology Sectors

Duration: 60 Minutes

Learning objectives include:

An overview of R&D Tax Credits
Identifying Qualifying Research Activities
Defining the 4-Part Test
How to substantiate activities through documentation
Identifying Qualifying Research Expenses

Cost: FREE

Knowledge Level: Basic*

R&D Tax Credit Training for the Aviation Sector

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Definition of Qualified Research

Qualified research consists of research activities aimed at developing new or improved business components. A business component is defined as any product, process, technique, invention, formula, or software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.

The Four-Part Test

Activities eligible for the R&D Credit are described in the “Four-Part Test,” which must be met for the activity to qualify as R&D.

Permitted Purpose: The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component.
Elimination of Uncertainty: The taxpayer must intend to discover information that eliminates uncertainty regarding the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, the method of development or improvement, or the appropriateness of the business component’s design.
Process of Experimentation: The taxpayer must engage in a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or method to achieve that result, or the appropriate design of that result, is uncertain at the beginning of the taxpayer’s research activities.
Technological in Nature: The process of experimentation used to discover information must fundamentally rely on the principles of the hard sciences such as physical or biological sciences, chemistry, engineering, or computer science.

What records and specific documentation did Airtime keep?

As with any tax credit or deduction, Airtime needed to keep business records outlining the work performed in its R&D activities, including experimental activities and documents to prove that the activities took place systematically.

Airtime only kept records of its literature search results, leaving ample room for improvement in the area of substantiation.

As a company claiming the R&D credit, you always want to be “audit-ready”—meaning that if you were audited by the IRS, you could present documentation to show the progression of your R&D work. Here are some types of documentation that would be beneficial to keep in case of an audit: