New Car Fuel Rules Drive Product Innovation and R&D Tax Credits

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        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 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.


        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.

Article Citation List



Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Charles G Goulding is a practicing attorney with experience in R&D tax credit projects for a host of industries.

Spencer Marr is a Tax Analyst with R&D Tax Savers.

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