Four things to know about R&D tax credits for the aerospace industry

The R&D tax credit is available to companies developing new or improved products, processes, techniques, formulas, inventions, and software. The wide variety of innovation and activity across the aerospace, defense, and space technology industries make it a natural fit for R&D credits.

But first, what is the R&D tax credit?

It’s a dollar-for-dollar tax savings that directly reduces a company’s tax liability. There’s no limitation on the amount of expenses and credit that can be claimed each year. If the R&D credit can’t be used immediately or completely, any unused credit can be carried forward for up to 20 years.

In addition, previously filed tax returns can typically be amended for up to three years to claim the R&D credit retrospectively, providing an avenue to recoup previously paid taxes.  The R&D credit is also available both at the federal and state level, with approximately 40 states offering an R&D credit to offset state tax liability.

To help break down this complex topic, here’s a list of common questions aerospace companies have about the R&D credit.

How much can a company save with R&D tax credits?

Because there’s such a wide variety of qualified expenses within the aerospace industry, it’s difficult to give an exact estimate. Depending on client size and the types of activities performed, our clients have saved anywhere from $50,000 to $5 million through R&D tax credits.

The amount generated is based on the amount of expenses that are determined to be eligible for the credit, not the revenue generated by a company. Generally, we find the amount of federal credits to be approximately 5%–10% of a company’s development expenses during a given year. This figure can be much higher when state credits are factored in.

Note that qualified development expenses generally include much more than internal research and development, which is known as IRAD. Also, expenses incurred under contract may qualify if certain criteria are met.

What does the R&D credit apply to?

As previously mentioned, there’s a wide variety of activities that may qualify. Common themes could include improvements to systems, system components, manufacturing processes, and applications.

Companies working on something related to the development of aircraft, defense systems, or space craft could have activities that quality for the R&D tax credit. Types of companies not only include original equipment manufacturers (OEMs), but also those in their supply chain, including system integrators, designers, and component manufacturers, among others.