Tip #31 – Explore pilot model costs

Explore your potential pilot model costs. This can often add millions of dollars to your total qualified research expenses.

What do you think of when you hear the term “pilot model”?

Do you think prototype, do you think machinery, do you think production line?

As far as the U.S. Treasury is concerned, a pilot model is any physical item you build or buy to resolve an uncertainty. If your facts align, pilot models include prototypes, machinery, even an entire production line.

Not everyone has taken the time to explore potentially qualified pilot model costs. Even many CPAs simply don’t know how to build the case for including pilot model costs.

SPRX R&D Credit Tip – Explore your potential pilot model costs. This can often add millions of dollars to your total qualified research expenses.

What is a pilot model?

There is really no way around it, we are going to have to look at some tax regulations.

Treasury Regulation Sec. 1.174-2 (T.D. 9680), published on July 21, 2014, provides two key elements of a pilot model. First, the term "pilot model" is any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during the development or improvement of the product. This term includes a fully functional representation or model of the product or a component of the product. Second, the ultimate success, failure, sale, or other use of the research or property resulting from the research or experiment is not relevant to a determination of eligibility.

So, anything you build or buy to resolve an uncertainty can be a pilot model. Even if you use it in your business or sell it after the research is complete. Imagine how this can increase your qualified supply costs.

Preparation is key

Being prepared for an eventual R&D credit exam is a key theme found throughout the SPRX.tax R&D credit tips. That’s not by mistake. You can file any number you want on your tax return, however, defending that number is a different matter.

Pilot models are defined by multiple tests. You need to be able to present evidence that persuades an examiner that you meet each of the key tests. Consider the following:

  • What uncertainty did you encountered?
  • What pilot model was built or bought to test solutions to the uncertainty?
  • What were the specific costs of the pilot model?
  • What specific tests were conducted on the pilot model?
  • What was the outcome of the testing?

The IRS is not the only entity that may exam your pilot model costs. State taxing authorities, financial auditors, internal team members may all ask you to defend your pilot model position. Preparation now will pay off in spades when the examinations begin.

Help is available

SPRX.tax has the technology tools and the professional expertise to help you explore your pilot model costs.

A.I. tools can read, analyze, and score all documents associated with your pilot models. This will help you quickly identify the most persuasive documents related to the pilot model requirements. You will want to know what documents support your position as well as which documents may refute your position.

The SPRX.tax team of experts has practical experience defending hundreds of millions of dollars of pilot model costs. We’ve worked with the IRS national leaders and multiple appeal agents across the country to defend pilot model costs.

At SPRX.tax we build the tools that save you time…and money.