Transportation R&D Tax Credit Benefits for Businesses

Transportation and R&D Tax Credit

Small businesses in the transportation sector can significantly benefit from the Research and Development tax credit by claiming expenses related to the development or improvement of logistics systems, routing software, or vehicle technology. The R&D payroll tax offset for startups is particularly valuable, allowing eligible early-stage companies to apply the credit—up to $500,000 annually—against their payroll tax liability. This helps reduce employment tax costs, freeing up capital to invest in innovation, hire talent, and scale operations. By leveraging this incentive, transportation startups can boost competitiveness and growth while alleviating the burden of personnel expenses.

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Founded in 1984 by J.W. Norris as Reed & Co., Swanson Reed has grown to become one of the world’s largest firms specializing in Research and Development (R&D) tax credit consulting. We boast numerous publications. Our AI software, TaxTrex, is a state-of-the-art AI 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 need further assistance, please call or send an email to 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 convenient for you.

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Case Study: Transportation

Business Scenario

This case study exemplifies the application of key legislative requirements for qualifying R&S activities, applied to relevant activities in the transportation sector.

Earhart Engineering is a widely renowned engineering firm specializing in the modern construction of transportation methods, systems, and equipment.

Dedicated to being a step ahead of its competitors, Earhart Engineering proposed an R&D plan to create the ‘Self-e’, an electric and autonomous vehicle/aircraft. Earhart’s main goal was to develop a street-legal vehicle/aircraft using battery technology that allowed it to travel up to 500 miles without needing a recharge, while being fully machine-operated.

To qualify for the Research and Experimentation Tax Credit, Earhart Engineering needed to ensure its “qualified research” met four main criteria, known and developed by Congress as the Four-Part Test. After a self-assessment, Earhart Engineering declared the following experiments as R&D activities.

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Earhart Engineering’s Eligible R&D Activities

Design and development of a series of prototypes to achieve technical objectives (design of the Self-e vehicle/aircraft).

The hypothesis for this R&D activity was that the design, testing, and evaluation of various concepts would contribute to a more efficient and effective prototype testing phase.

After two years of design and experimentation, Earhart Engineering concluded that its theoretical design experiments showed that such designs were feasible but needed to be prototyped and fully tested to prove the hypothesis.

Testing and data analysis to achieve reproducible results to a satisfactory standard and to test the hypothesis (development and testing of the Self-e vehicle/aircraft prototype).

Earhart Engineering’s hypothesis for this experiment was that the development and implementation of various design components would allow for refining and perfecting the final product to achieve technical objectives.

After two years of trial and error, Earhart Engineering had created a vehicle capable of performing the main functions of the ‘Self-e’ but overall it was below the company’s expectations. Earhart Engineering concluded it was on the right track and would continue working to improve its design until it met the set performance criteria.

Background research to assess current knowledge gaps and determine feasibility (background research for Self-e design).

Earhart Engineering engaged in background research for two years which included activities such as literature research and review, consultation with industry professionals and potential clients, and preliminary review of equipment and resources regarding capabilities, performance, and suitability for the project.

These specific background research activities qualified as R&D because they helped identify key elements of the research project.

Ongoing analysis of customer or user feedback to improve prototype design (feedback-based R&D for Self-e).

The feedback-based R&D work for the Self-e included continuous analysis and testing to improve the efficiency and safety of the design, ongoing development and modification, and commercial and functionality analysis.

Earhart Engineering believed these activities were necessary to evaluate the performance capabilities of the new design in the field and to improve any flaws in the design, thus qualifying as R&D.

Live Webinar: The R&D Tax Credit in the Drones and Transportation Technologies Sector

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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*

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Definition of Qualified Research

Qualified research consists of research activities with the intent of 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 that are 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 would eliminate 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 design of the business component.
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 Nature: The process of experimentation used to discover information must fundamentally rely on principles of the hard sciences such as physical or biological sciences, chemistry, engineering, or computer science.

What specific records and documentation did Earhart Engineering keep?

Similar to any tax credit or deduction, Earhart Engineering had to keep business records outlining what it did in its R&D activities, including experimental activities and documents to prove that the work took place systematically. Earhart Engineering kept the following documentation:

Literature review
Background research
Meeting notes or minutes or progress reports
Project records / lab notes
Conceptual sketches
Design drawings
Photographs / videos of various parts or components

By having these records on file, Earhart Engineering confirmed it was “compliance ready”—meaning if it were audited, it could present documentation illustrating the progression of its R&D activity, ultimately proving its eligibility for the R&D credit.