R & D Credit Maybe - Maybe Not

[Terry D EA]

I have a long time client who owns and operates an automotive transmission repair shop. The client is well known in his area as the one who can fix problems that no one else can. The client has made repairs for Chrysler with notable success that Chrysler would not do themselves. The has now purchased (3) different 10 speed transmissions to study, make modifications, and put in a vehicle to collect data. The main purpose of this project is to make improvements that are beneficial to his customers and to ensure the repair/modification is successful. The client has now also purchased a vehicle with a 10 speed in it for experimentation. This company is an S-Corp that averages 750K to 1M a year in revenue. All of this sounds like the criteria is met for research and development. He is just not a mega monster with billions of revenue.

1. Would any of this fall under "research and development" to claim any of the R&D credits? 

2. At the very least, wouldn't the expenses involved in this project be deducted as a business expense? While I don't think it would be considered ordinary and necessary, the goal again is product improvement.  This is also an investment to generate revenue.

Opinions on this please.

[Max W]

R&D falls under the criteria of section 174.  I doubt that your clients efforts for a credit would meet all 4 standards.  If it is taken as an R&D expense it is amortized over 5 years.   It could be a better choice to patent his modifications.