New Car Fuel Rules Drive Product Innovation and R&D Tax Credits
The new federal minimum auto mileage requirements require
substantial fuel reductions and are resulting in a wide range
of product innovations that will facilitate the transition to
higher fuel efficiency. This article will discuss four of the
major innovations including: 1. Carbon fiber materials; 2.
Hydrogen fuel cells; 3. GPS/ Software developments; and 4.
Electric cars. These new products present major R & D tax
credit opportunities.
The Research and
Development Tax Credit
Federally enacted in 1981, the R &
D tax credit allows a credit of up to 13% of eligible spend
for new and improved products and processes. Qualified
research must meet the following four criteria:
- New or improved product,
processes, or software
- Technological in nature
- Elimination of uncertainty
- Process of experimentation
Eligible costs include employee wages, cost
of supplies, cost of testing, contract research expenses, and
costs associated with obtaining a patent.
The New Auto Mileage
Requirements
In November of 2011, Congress voted to
adopt a bill that will require all cars and trucks sold in the
U.S. to increase their fuel economy to 54.5 miles per gallon
(MPG) by the year 2025. It will require 5% annual increases in
fuel efficiency for cars and trucks, and 3.5% annually for
light trucks. In order to meet that burden, the bill provides
incentives for developing electric vehicles. Unlike prior
increases in the nation's fuel efficiency standards, this most
recent legislation has been met with unanimous industry-wide
support. In a consumer market where there is mounting demand
for increased in efficiency to offset ever-higher gasoline
prices, it makes economic sense for the nation's largest auto
companies to embrace a wide range of fuel efficiency
technologies.
The Four R&D
Technologies
Carbon Fiber
Carbon-fiber-reinforced
polymer, commonly referred to as simply "carbon fiber," is a
very strong and light material used in everything from
baseball bats to spaceships. In the auto industry, carbon
fiber has long been regarded as one of the best materials for
constructing a car body because of its high strength-to-weight
ratio and good rigidity, though manufacturers have been
limited to using carbon fiber in only high end cars because it
is relatively expensive. Fortunately, improved manufacturing
techniques are reducing the costs and time to manufacture
carbon fiber, making it possible to use the material in a
wider range of vehicles. This is an important development for
companies seeking to comply with the new fuel standards, since
one of the most important factors in an automobile's fuel
efficiency is its weight. To that end, it is notable that BMW,
Audi, and Volkswagen have all recently invested in
lightweight-materials manufacturers like SGL Carbon SE in
order to leverage their equity stake into cheaper supplies of
carbon fiber.
Hydrogen Fuel Cells
A hydrogen fuel cell is
a device that converts the chemical energy from hydrogen into
electricity through a chemical reaction with oxygen or another
oxidizing agent. By some estimates, this technology achieves a
40-45% increase in efficiency over today's internal combustion
engines. Unlike a traditional battery, a hydrogen fuel cell
requires a constant source of hydrogen and oxygen to run, but
it can produce electricity continually for as long as these
inputs are supplied. To date, the largest obstacle to making
the hydrogen fuel cell commercially available on a wide scale
has been coming up with a solution for constantly supplying
the hydrogen needed; this is a great opportunity for many
manufacturers to invest substantial time and money into a
R&D credit-eligible project. Indeed, many of the largest
auto manufacturers in the country have released prototypes and
demonstration cars that utilize the technology along with the
necessary hydrogen filling stations to keep the vehicles
going. While the industry is still some distance from being
commercially viable, there are federal Department of Energy
(DOE) grants available that are meant to accelerate the pace
of development of commercial hydrogen fuel cells. In fact, on
December 21, 2011, the DOE awarded $7 Million to four projects
that are working on cheaper, better hydrogen storage tanks:
Berkeley National Lab, HRL Laboratories, the University of
Oregon, and Pacific Northwest National Laboratory.
Non-government laboratories and companies researching and
developing advanced batteries like hydrogen fuel cells can
combine these grants with the R&D tax credit in order to
substantially reduce the cost of such investments.
GPS/Software
GPS software and
hardware, such as the ubiquitous navigation systems now seen
in cars all over the country, have been around for a while.
Yet recent developments within the industry, such as terrain
adjustment software and Google's driver-less car initiative,
are changing the landscape of the GPS market. These new pieces
of software draw on cutting-edge research being done in
university labs, and will enable the vehicles that use them to
optimize the efficiency of their existing technologies by
adapting to changing road conditions in real time. For
instance, the Active Prediction system from Volkswagen
subsidiary Scania automatically adjusts speed based upon
terrain features of the road ahead, providing up to 3% fuel
savings compared with regular cruise control.
Electric Cars
Electric cars have
entered the commercial market in the last few years, and they
represent an emerging trend in the automobile industry that is
increasingly focused on moving away from fuel-inefficient
internal combustion. In order to support this technology,
which boasts exceptional fuel efficiency and is more reliable
now than ever before, the government offers manufacturers and
purchasers of electric cars several tax incentives. For
instance, the Section 30D per vehicle tax credit for
purchasing an electric car weighing less than 8,500 pounds is
capped at $7,500. The credit is equal to the sum of $2,500
with an additional $417 for each kilowatt hour of battery
capacity in excess of 4 kilowatt hours . Additionally, the
extension of the Bush era tax incentives included a provision
extending the 30% tax credit for the purchase and installation
costs of charging equipment up to $30,000 for businesses (Sec
30C) and $1,000 for individuals (for one year through December
31st, 2011). General Electric has embarked on a major
marketing initiative to introduce its battery charging product
directly to consumers. Consistent with this initiative GE has
recently announced that it will be purchasing 25,000 electric
cars for its corporate fleet by 2015. Recognizing the
underlying need for battery charging system Nissan has
endeavored to support its electric car initiative with
infrastructure support including the concurrent sale of
chargers with its electric cars. eTec/Ecotality in Michigan
was granted $8 million to wire five regions in the country and
to supply 12,500 charging stations to support 5,000 Nissan
"Leaf" EV's.
Conclusion
The new auto fuel requirements demonstrate
how setting the performance bar at a high level in a major
industry drives tremendous product innovation. Moreover,
multiple competing technologies are offering alternative
solutions. Tax advisers involved in all of the industries
described above should monitor these developments and assist
their clients in obtaining R & D tax credits.
