Dealerships may not traditionally view themselves as performing Research and Development (R&D), but technology development is becoming a larger part of how some dealership groups operate. Dealers are routinely investing in customized software, artificial intelligence, data analytics, system integrations and automation to improve inventory management, vehicle acquisition, customer engagement and other operations.
Some of the costs associated with developing these technologies may qualify for the federal R&D Tax Credit under Internal Revenue Code Section 41. A dealership that develops or substantially improves its own software, systems or technology may perform qualified research if the underlying development activities satisfy the R&D tax credit requirements.
Purchasing, configuring or implementing commercially available software generally does not constitute qualified research. The analysis changes when a dealership develops or materially improves technology to address needs that existing solutions cannot satisfy.
Potential areas of technology development may include:
The key distinction is the development effort, not simply the dealership’s use of sophisticated technology.
Software development does not automatically qualify for the R&D tax credit. The activities generally must satisfy the R&D four-part test:
AI can make technology development more accessible to dealerships, but simply using AI does not create qualified research.
Using an existing AI product for marketing content, administrative tasks or other routine functions generally would not qualify merely because AI is involved. A stronger case may exist when a dealership uses AI as part of developing its own technology and encounters technological uncertainty requiring experimentation.
For example, a dealership developing a proprietary application to predict used-vehicle acquisitions might test different combinations of historical sales data, market information, vehicle characteristics and pricing data. If initial approaches fail to achieve sufficient accuracy and the team evaluates and tests alternatives, those activities may present a stronger R&D credit opportunity.
The key question is not whether AI was used, but whether the development involved technological uncertainty and a process of experimentation to resolve it.
When the underlying research qualifies, potential Qualified Research Expenses may include:
Trying to reconstruct development activities after the fact can make supporting an R&D credit more difficult, particularly as AI allows teams to move through technical iterations quickly.
Dealerships developing proprietary technology should consider retaining contemporaneous records such as:
The goal is to document not only what was built, but also the technological uncertainties encountered and the experimentation performed to resolve them.
Withum’s R&D Tax Credit Services team can help dealerships and dealer groups identify potentially qualifying technology initiatives, evaluate projects under Section 41, analyze qualified research expenses and develop documentation procedures to support the credit.
If your dealership is investing in proprietary software, AI applications, automation, analytics or other technology, a conversation with your Withum tax advisor can help determine whether an R&D tax credit opportunity exists.
Many businesses qualify for the R&D Tax Credit but don’t fully capture its benefits. Withum’s complimentary 30-minute R&D Tax Credit Assessment helps you quickly determine eligibility and potential value.
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