Key Takeaways
- Aerospace and defense companies often qualify for R&D tax credits through prototyping, testing, and engineering advancements.
- Activities like avionics design, propulsion testing, and autonomous systems development commonly meet IRS criteria.
- Both federal and state R&D tax credits can significantly reduce tax liabilities.
The aerospace and defense industries are synonymous with innovation, constantly pushing the boundaries of technology. If your business is developing cutting-edge systems or improving existing ones, you could be eligible for significant tax savings through the R&D tax credit.
Qualifying Activities in Aerospace and Defense
Here are some common activities in this industry that may qualify:
- Aircraft Design and Development
Creating new aircraft or improving existing designs for safety, efficiency, or performance. - Material Innovation
Experimenting with lightweight or durable materials to enhance aerodynamics, fuel efficiency, or structural integrity. - Defense Systems Advancements
Developing new weapons systems, communication technologies, or surveillance tools. - Testing and Prototyping
Conducting wind tunnel tests, creating prototypes, or testing new systems under real-world conditions. - Improving Manufacturing Processes
Streamlining production lines or integrating advanced robotics for aerospace and defense manufacturing.
Breaking Down the 4-Part Test for Aerospace and Defense
- Business Component Test:
Activities related to aircraft, spacecraft, defense systems, or manufacturing processes meet this test. - Technological in Nature Test:
Efforts grounded in physics, engineering, or computer science qualify here. - Elimination of Uncertainty Test:
Questions like “How can we improve fuel efficiency?” or “What materials will perform best under extreme conditions?” indicate this test is met. - Process of Experimentation Test:
Conducting simulations, prototyping, or testing alternatives fulfills the experimentation requirement.
Related Content for Aerospace Companies
Check out Qualified Research Expenses (QREs): Breaking Down the Basics and Common Misconceptions About R&D Tax Credits.
Claim R&D Tax Credits Today
The Research & Development Tax Credit and Aerospace & Defense go hand in hand. Contact us to get started on claiming the R&D Tax Credit and reducing your tax bill today!
Examples of Qualifying Activity
Aircraft Manufacturing
- Example: The development of next-generation commercial and defense aircraft with improved fuel efficiency, aerodynamics, and material composition.
- 4-Part Test:
- Permitted Purpose: Seeks to improve aircraft performance, safety, and fuel efficiency.
- Technological in Nature: Utilizes principles of aerodynamics, structural engineering, and materials science.
- Elimination of Uncertainty: Testing new wing designs and composite materials to determine their impact on weight reduction.
- Process of Experimentation: Iterative prototyping, wind tunnel testing, and computational fluid dynamics simulations.
Spacecraft & Satellite Development
- Example: Designing reusable rockets and deploying advanced communication satellite networks to improve cost efficiency and reliability.
- 4-Part Test:
- Permitted Purpose: Aims to enhance reusability, reduce launch costs, and improve satellite performance.
- Technological in Nature: Involves propulsion engineering, orbital mechanics, and materials science.
- Elimination of Uncertainty: Determines whether new heat shield materials can withstand re-entry or if propulsion systems can be efficiently reused.
- Process of Experimentation: Flight testing, computer modeling, and real-time telemetry analysis.
Defense Contractors
- Example: Developing military aircraft, missile guidance systems, and next-gen cybersecurity solutions for national defense.
- 4-Part Test:
- Permitted Purpose: Enhances stealth capabilities, targeting accuracy, and cybersecurity resilience.
- Technological in Nature: Relies on physics, software engineering, and materials science.
- Elimination of Uncertainty: Evaluates whether new radar-absorbing coatings effectively reduce detection range.
- Process of Experimentation: Field tests, electromagnetic simulations, and AI-driven cybersecurity stress testing.
Avionics & Navigation Systems
- Example: Creating advanced cockpit displays, autopilot systems, and navigation software for commercial and defense aircraft.
- 4-Part Test:
- Permitted Purpose: Improves flight safety, automation, and navigational precision.
- Technological in Nature: Uses aerospace engineering, electronics, and software development.
- Elimination of Uncertainty: Determines whether sensor fusion can enhance GPS accuracy in low-visibility conditions.
- Process of Experimentation: Prototype avionics testing, software simulations, and real-world flight evaluations.
Aerospace Engineering Services
- Example: Providing structural analysis, aerodynamics consulting, and material testing for aircraft manufacturers and defense projects.
- 4-Part Test:
- Permitted Purpose: Develops and validates safer, lighter, and more durable aircraft components.
- Technological in Nature: Uses mechanical engineering, fluid dynamics, and material sciences.
- Elimination of Uncertainty: Analyzes whether advanced composite materials can withstand extreme stress conditions.
- Process of Experimentation: Wind tunnel testing, computational modeling, and fatigue testing.
Unmanned Aerial Systems (Drones)
- Example: Designing drones for commercial, military, and industrial applications, including aerial surveying, logistics, and defense.
- 4-Part Test:
- Permitted Purpose: Enhances drone stability, autonomous navigation, and payload efficiency.
- Technological in Nature: Uses robotics, AI, and aerodynamics principles.
- Elimination of Uncertainty: Evaluates whether AI-assisted object detection improves drone autonomy in complex environments.
- Process of Experimentation: Field testing, machine learning model training, and iterative software updates.
Military & Defense R&D
- Example: Researching next-generation battlefield technologies, including AI-assisted targeting, hypersonic missiles, and electronic warfare systems.
- 4-Part Test:
- Permitted Purpose: Develops new military technologies for defense and strategic operations.
- Technological in Nature: Uses physics, engineering, and cybersecurity methodologies.
- Elimination of Uncertainty: Determines whether hypersonic missile designs can maintain stability at extreme speeds.
- Process of Experimentation: High-speed wind tunnel testing, AI-driven simulations, and live-fire tests.
