Bicycle Designers & Manufacturers Obtain R&D Tax Credits for Innovation
Bicycle
The technological difference between a bicycle from 1980 and
today is the equivalent of an alien ship arriving to Earth in
a Sci-fi thriller. Even over the past several years, the
design of bicycles has drastically changed. The evolution of
the bicycle is built upon innovators spending countless hours
drafting, designing, tinkering, and testing. These days we
refer to the countless hours spent redefining the bicycle,
simply as R&D.
From 2001 to 2009, the number of trips made by bicycles in the
U.S. more than doubled from 1.7 billion to 4 billion.
This growth is largely attributed to a wave of research and
development, which fuels an endless stream of new products and
constant improvements to existing products. Bicycle
manufacturers are in an arms race of innovation to develop a
better bike, a bike that will win the hearts and minds of
their competitors’ customers and ultimately convert those
customers. The best part about this arms race is that through
the Federal Research and Development Tax Credit, bicycle
manufacturers can recoup some of the costs of developing their
armaments of innovation.
The Research &
Development Tax Credit
Enacted in 1981, the Federal Research and
Development (R&D) Tax Credit allows a credit of up to 13%
of eligible spending for new and improved products and
processes. Qualified research must meet the following four
criteria:
- New or improved products,
processes, or software
- Technological in nature
- Elimination of Uncertainty
- Process of Elimination
Eligible costs include employee wages, cost of supplies, cost
of testing, contract research expenses, and costs associated
with developing a patent. On December 18, 2015, President
Obama signed the bill making the R&D Tax Credit permanent.
Beginning in 2016, the R&D credit can be used to offset
Alternative Minimum tax and startup businesses can utilize the
credit against payroll taxes.
R&D Tax Credit
Opportunities for Bicycle Design
It can be a bit overwhelming when an
individual steps into their local bike shop and gazes at all
the gleaming bikes on the display floor. There is a bike
specifically designed for every application imaginable. There
are mountain bikes, road bikes, hybrids, performance hybrids,
comfort bikes, fat tire bikes, 29ers, downhill bikes, and the
list goes on. Each of these bikes has been engineered to excel
at a particular task.
Hybrids are designed to be comfortable for the everyday rider,
the kind of person that just wants to get on a bike and have
fun. The geometries of a hybrid frame and stem configuration
ensure that the rider is sitting upright, and most of all,
comfortable.
Performance hybrids, on the other hand, have different frame
geometries that allow for a more aggressive and faster ride.
The geometries of a performance hybrid force the rider to lean
for¬ward, which results in less drag. On a regular hybrid, the
rider is sitting up straight acting as a giant sail of air
resistance. On a performance hybrid, this sail of air
resistance is reduced because the rider is leaning forward
which exposes less of the rider's surface area. Performance
hybrids also have other features like narrower tires, which
allow for higher speeds.
The geometries of a road bike are even more extreme than that
of a performance hybrid. The rider is completely bent over the
bicycle for maximum aerodynamic efficiency. The stem and
handlebars are lowered to increase aerodynamics. Road bikes
allow riders to attain great speeds but are very demanding on
the body and may not be for those who are not acclimated to
the rigors of road biking.
Every bicycle that is
engineered for a particular application has undergone an
extensive design and development process. Mechanical engineers
and material specialists have painstakingly analyzed every
aspect of the bike and modified the design countless of times
using CAD software. Some of these modifications of the
design are to increase the performance of the bike, while
other modifications are to make the bicycle easier to
manufacture or more economical to produce. After the
challenging design process, prototype bicycles undergo a
litany of safety as well as performance testing. Everything in
the development of new bicycles, from design to testing is
potentially an R&D tax credit eligible activity.
Any Frame Material can
be R&D Tax Credit Eligible
Besides the intended application of a
bicycle, the next aspect that sets two bicycles apart is the
material that comprises the frames. The most common frame
materials are steel, aluminum, carbon, and titanium. Each of
these materials have its merits. Steel frames are not as
common as they use to be, but they are still being
manufactured. Steel is strong and provides a lively feel, but
most people tend to lean towards lighter aluminum designs.
Aluminum is the most common frame material. However, due to
aluminum’s low density, it requires larger tube diameters than
steel to achieve structural stability. One consequence of a
larger tube diameter is what many people may deem as a harsher
ride. This is why many people seek out titanium or carbon
bicycles.
Titanium is durable, lightweight and provides a happy medium
of stiffness. Titanium is also nonferrous, making it very
corrosion resistant. Another important aspect of titanium is
that it can be manufactured to achieve the required stiffness
to accommodate larger riders. It isn’t uncommon to see a
larger than life rider sit on an aluminum frame with a
concerned look on their face as they listen to an aluminum
frame creek and moan underneath their weight. Titanium frames
can help prevent these kind scenarios from occurring.
These days the material of choice for competitive riders is
carbon4 fiber composite. Carbon fiber composite is
comprised of non-metallic graphite fiber cloth that is layered
together with high strength epoxy resin to form a matrix. The
key to carbon fiber frame design is the placement of different
grades carbon as well as the volume of carbon within strategic
areas of the frame. What makes carbon fiber frames so
desirable is that the structure of the carbon fiber matrixes
can vary throughout the fame. This variance allows for
enhanced performance. Different areas of the frame can be
enhanced for stiffness, which allows for the maximum transfer
of energy from the rider to the crank. Anytime the frame of a
bicycle flexes, power is lost. While some areas of carbon
frames should be as stiff as possible, other areas can be
optimized for compliance, which results in a smoother ride
that allows the rider to travel longer distances.
When it comes to bicycle
frame design, companies lie at all points of the capabilities
spectrum. Companies like Pure Cycles, based out of California,
that specialize in the manufacturing of simplistic steel
bicycles, still spend a significant amount of time designing
each new model. Even though Pure Cycles works with steel,
which may not be the most technically advanced material, they
are still engaged in R&D activities. The development of
their bicycles requires mechanical engineering and industrial
engineering expertise. Pure Cycles most likely uses CAD
software to model how their frames will handle under various
forces. When designing a new bicycle, for the most part,
companies do not know what the end design of the bike will be;
that is the reason why companies embark on the design process
to begin with. This uncertainty before engaging in the
development of a project is key to R&D Tax Credit
eligibility. Any bicycle manufacturer that designs frames
should pursue the R&D Tax Credit.
Carbon and the R&D
Tax Credit
A customer walks into bicycle shop and
makes their way to the road bike section. They notice that
there is long aisle of carbon road bikes. How do they know
that they are looking at carbon? Well, the high price tag and
the sleek construction of the bikes is undoubtedly a first
indication. Also, there are no welds to be found. Carbon fiber
composite bicycles are significantly more expensive than their
metallic counterparts for a variety of reasons. First off,
there are few companies that are capable of manufacturing raw
carbon fiber due to the high capital investment required in
equipment and technical expertise. Secondly, the design of
carbon fiber composite bicycles requires highly sophisticated
and expensive software. Then there is the cost of hiring
people with advanced degrees to use the software. Finally, all
carbon frames are handmade. With these factors in mind, a
customer may still wonder what the difference is between a
$1,500 carbon bike and a $9,000 carbon bike.
Carbon fiber can come in many different forms and stiffnesses.
Carbon fiber is rated in terms of tensile modulus, which is
essentially how stiff the carbon fiber is. There are four
levels of carbon fiber: standard modulus, intermediate
modulus, high modulus, and ultra high modulus. Carbon with a
high modulus rating takes additional processing to remove
impurities. High-end bicycles will use stiffer carbon in their
design with the goal of producing a bicycle that is highly
efficient at transferring rider energy into forward motion,
and this is why high carbon bikes can get so expensive.
High-end carbon composite bicycles are made with multiple
levels of carbon that are strategically placed throughout the
frame to create a frame with the optimal mix of durability,
performance, and ride quality. The use of sophisticated CAD
software is essential to determine the optimal rigidity and
lightness of carbon bicycles. Designers must determine the
kind carbon to use, where that carbon should go, the
dimensions of the carbon and the orientation of the carbon
ply.
The development process of carbon fiber composite bicycles is
sophisticated and is more costly than bicycles compromised
from metal. Since carbon bicycles are built by hand, the
R&D process for companies large and small is similar.
Skilled craftsmen make each prototype by hand and then the
prototypes must be tested using a wide range of sensors and
tools for structural integrity and performance. Specialized,
one of the biggest names in the industry, even has its own
wind tunnel which they use to test the aerodynamic performance
of their bicycles. Companies that are engaged in the
development of carbon fiber composite bicycles are engaged in
R&D eligible activities. Technical labor hours spent
designing, building, and testing prototypes can be applied to
the credit. The R&D Tax Credit also allows for materials
consumed during the development process of new products as
well as the improvement of existing products to be applied to
the credit. This means the cost of expensive materials such as
carbon fiber can be offset.
Opportunities for
Digital Gear Shifting
In recent years, there has been a major
push toward electronic shifting. Electronic shifting has been
around for years but until recently, the technology has not
had a strong foothold in the cycling community. Companies like
Shimano, Campagnolo, and Chicago-based SRAM are leading the
vanguard in the technological advancement of electronic
shifting. Some benefits of electronic shifting are a sleeker
bike appearance, excellent shift quality, and requiring less
skill. Additionally, road grime does not gunk up cables and
degrade shift quality over time. Electronic shifting groupings
are also becoming lighter than their mechanical counterparts.
SRAM’s new electronic grouping, Red eTap increases the scope
of electronic shifting by turning a bicycle into a micro
network. The Red eTap system has taken SRAM over five years to
develop. The system is both electronic and wireless.
Electronic shifting is still in its infancy, and it provides a
great opportunity for the R&D tax credit. Currently,
electronic shifting is constrained to a handful of drive
trains. The development of new shifting systems that are
designed to electronically shift drives trains with different
numbers of gears is credit eligible. Another R&D
opportunity is the development of firmware that allows for the
adjusting the number of drivetrain speeds. Any company
developing ways to reduce lag time of electronic signaling,
cutting power to improve battery life, or enhancing the way
electronic shifting components interact with water can apply
for the R&D Tax credit.
Making the R&D Tax
Credit a Yearly Ritual
Every year across the U.S over 10,000
bicycle mechanics open up bike boxes and pull out the
necessary components to build the most efficient mode of
transportation on the planet. Accordingly, every year the
bike’s feature design distinctly changes. Even the packaging
that the bicycles come in changes from year to year. Usually,
the packaging is upgraded to protect the bicycle during
shipping. A bike store manager once said to a disgruntled
custom¬er, “Every bike is going to have some kind of blemish
on it. You would have scratches on you too, if I shipped you
in a box from China."
Manufacturers routinely make modifications to the design of
bicycles for a variety of reasons. Some modifications entail
the integration of new hardware that makes the build process
for the mechanics more efficient while other changes are
clearly designed to reduce the cost of the bicycle, even if
increases the time required to build the bicycle. Frequently
the geometries of frames are altered to set the current year’s
model apart from last year’s model and to give customers a
reason to upgrade. The shifting, breaking, and drive train
components of bicycles also change from year to year.
Often the changes made to a particular model is part of a
grand experiment. This experiment relies on a dialog between
customers, bicycle mechanics, sales people, and the sales
representatives of the manufacturer. Sales reps routinely come
into bike shops to inform mechanics and sales people about the
new features and technologies that will be incorporated into
next year’s model, while simultaneously asking what people
think about the current models. When manufacturers are
determining what changes to make to a model, this dialog can
be a treasure trove of information.
The yearly modification and alteration to the design of
current bicycles models is an R&D Tax Credit eligible
activity. Manufacturers who change the design of their
bicycles to increase performance, quality or to reduce the
cost of manufacturing can and should apply for the R&D Tax
Credit on a yearly basis. Even design improvements made to
packaging is a credit eligible activity.
Reinventing the Wheel
In the mountain bike community, there has
been a major debate of what is the most efficient wheel size
is. Many enthusiasts believe that one particular wheel size
can be universally better than another wheel size, but this is
not the case. Different wheel sizes are optimal for different
applications as well as rider sizes and riding styles.
When it comes to cross country mountain biking and the need
for speed, the larger the bicycle wheel, the better. Titans of
the bicycle industry like TREK, Specialized, and Giant have
all utilized advanced software and testing equipment to prove
this. Bicycles with 29-inch wheels are faster than 27.5-inch
wheels, but smaller riders should ride the 27.5-inch wheel.
When a small rider sits on a 29er, their body geometry is
thrown off, which leads to a decrease in efficiency and
therefore speed.
When it comes to trail bikes, wheel size is more dependent on
riding style. A trail rider who wants stability and the
confidence to roll over obstacles should go with at 29er. A
rider who wants to defy the Earth’s gravity and hit the jumps
should go with a 27.5.
27.5-inch wheels are still relatively new to the cycling
industry, so many manufacturers are currently engaged in
developing their own version of a 27.5-inch mountain bicycle.
Companies looking to expand their product offerings through
the development of bicycles of different wheel sizes can use
the R&D Tax Credit to mitigate the cost of development.
R&D Tax Credit
Opportunities for Fat Tire Bikes
The Wall Street Journal reports that sales
of all-terrain “fat tire” bicycles has increased by a factor
of six between 2013 and 2015. Fat tire bikes are a game
changer for the off-road bicycle world. Fat tire bicycles look
beefy and aggressive, but they also have extreme utility.
Fat tire bikes are not as ubiquitous as conventional mountain
bikes but when they are seen on the trail its usually only for
a matter of seconds. Before a fat tire sighting, trail riders
will most likely hear “Excuse me. Coming through!” This is
right before the fat tire bike passes by, traversing roots and
any other obstacle in its path.
The larger tires on a fat tire bicycle allow for superior roll
over ability. This ability to roll over any obstacle with ease
enables seasoned riders to push the limits of the trail. The
increased stability of fat tire bicycles has also enabled less
skilled riders to venture onto mountain bike trails. Another
reason for the growing demand for fat tire bicycles is their
unique ability to transverse snow and sand.
When fat tire bikes first came on to the scene, there were
some problems with the bikes. Because the tires of a fat tire
bike are so wide, the rear cassette is displaced from where it
would normally sit on the bicycle. During certain gear
settings, this displacement created an extreme angle between
the rear gears of the cassette and the forward gears of the
crank. The extreme angle caused the chain to bind and run
roughly. Even though this is an undesirable issue, it creates
a perfect opportunity for the R&D Tax Credit. The
development work to resolve this issue and other issues like
it are R&D Tax Credit eligible.
Fat tire bikes are a relatively new phenomenon and like any
emerging technology, there are plenty of opportunities to
optimize and enhance the original design. Manufacturers are
currently focused on enhancing the design of fat tire bikes
through the improvement of the suspension systems, weight
reduction, and the integration of eclectic assist motors. The
developments of new fat tire bike models and the improvement
of existing models are R&D Tax credit eligible activities.
Mountain Bike
Technology
In the United States, close to 40 million
Americans actively mountain bike. Manufactures have ramped up
their R&D efforts in mountain bike technologies to develop
a better mountain bike and to increase their market share.
Every aspect of the mountain bike is being leveraged for
maximum performance. Designers are using physics and
mechanical engineering principles to enhance frame geometries,
suspension responsiveness, and brake stopping power.
Industry leader Trek is teaming up with outside professionals
such as Penske Racing Shocks, a company that specializes in
the manufacturing high-performance shocks for the car racing
industry. Bicycle manufacturers are striving to develop shocks
that offer the ultimate performance in climbing and shock
dampening. This is a challenging endeavor because the forces
that are exerted on a bike during a climb and during a big
impact vary vastly. When climbing it is imperative for the
back wheel to remain in contact with the ground at all times.
This means that the suspension should be as stiff as possible
so that each pedal stroke can propel the rider forward.
Conversely, the rider can experience a reduction in speed if
the suspension system does not adequately react to impacts of
varying magnitudes. For example, if a rider hits a bump or a
root on a climb and the suspension overreacts, the back wheel
will slip, which will lead to a loss in stability.
There has never truly been a shock that has provided efficient
pedaling while simultaneously being able to absorb the impact
of instantaneous impacts. Shock absorption systems usually
excel at only one of these tasks. Trek is now using new
regressive damping technology to provide platform efficiency
while pedaling and to absorb the impact from instantaneous
shocks.
Any company that is enhancing the design of their mountain
bikes to increase performance can apply for the R&D Tax
Credit. Improvements to the mechanical design of the
suspension system, the design of the frame-and-its linkage
systems, and any other design improvements are R&D Tax
Credit eligible activities. This means that smaller companies
that do not have the resources to invest in the design of
suspension components can still claim the credit. Small-scale
bicycle manufacturers are engaged in R&D activities when
they design their mountain bikes to accept suspension systems
developed by third parties. Furthermore, the R&D Tax
Credit enables firms to apply R&D contractor expenses to
the credit. For example, Trek could potently apply contractor
expenses from their work with Penske Racing Shocks during the
development of the RE:aktiv system to their R&D Tax
Credit.
R&D Opportunities
for Electric Assist Bikes
Cycling is quickly gaining traction and
becoming a more popular mode of transportation. The amount of
bike lanes that are springing up throughout the U.S. is a
testament to this. People are integrating bicycles into their
lives. Cycling is no longer just a means within itself. People
are riding bikes to get to work, to pick up groceries, and to
get to wherever point B is. The only problem is that not
everybody lives within reasonable distance to his or her place
of employment, and they do not want to be dripping with sweat
when they arrive there. A trip to the local grocery store is
not an arduous journey, but riding back home up a grade with
panniers overflowing with groceries can be breathtaking and
not in a good way. It's scenarios like these that are turning
people to electric assist bikes. Bicycle manufacturers can
expect electric bike sales to increase as the 74.9 million
baby boomers begin to age and require a little extra juice to
keep them riding.
Contemporary electric assist bikes are a far cry from their
predecessors. They look sleek, enjoy longer distances between
rides, and are lighter than previous models. Significant
improvements to electric assist bicycle design can be seen
every year. Manufacturers that continue to improve the design
of electric assist bikes are engaging in R&D Tax Credit
eligible activities and should use the credit to offset
development costs.
The Take Away
The bicycle industry is teeming with
innovation. This innovation stems from the R&D efforts of
the bicycle manufacturers that supply bike shops with a
never-ending stream of products. Essentially, every bicycle
manufacturers is engaged in R&D Tax Credit eligible
activities. This means both large scale and small scale
manufacturers should claim the credit. Even if the
manufacturer is not developing state-of-the-art carbon frames
or pushing the boundaries of efficiency, they should still
apply for the R&D Tax credit. As long as a manufacturer is
uncertain about exact design of the bicycle they are
developing, which is usually the case, the manufacturer is
most likely engaging in multiple R&D Tax Credit eligible
activities. The cost of technical labor hours, testing,
materials used up during the development of prototypes, and
even R&D contractor expenses can be utilized to obtain a
sizable tax credit. New provisions in the law allow startups
which are not yet showing a profit to claim the credit. This
means any bicycle manufacturer can apply for the credit and
offset the cost of their R&D activities.
