When most people think about “research and development,” they picture white lab coats, scientists, and high-tech facilities. Rarely does a fuel distributor or convenience operator come to mind. Even rarer is the thought that any of this might have something to do with taxes. Yet across the country, companies in the downstream energy sector (fuel wholesalers, terminal operators, and retail distributors, for example) are quietly driving innovation in ways that often qualify for substantial federal and state tax credits.
In an era of tight margins, volatile energy markets, and increasing regulatory pressure, the federal R&D Tax Credit is one of the most powerful, and underutilized, tools available to businesses in the fuel distribution industry. The credit rewards companies that invest time and resources in improving their products, processes, and systems. And while it’s been around since the 1980s, the scope of what qualifies has expanded dramatically, especially in industries that don’t traditionally think of themselves as “doing R&D.”
The Research and Development (“R&D”) Tax Credit, formally known as the “Credit for Increasing Research Activities,” was created in 1981 to encourage innovation within U.S. businesses. It provides a dollar-for-dollar reduction in federal income tax liability, and in many states with a similar state-wide program, a corresponding state-level benefit. At its core, the credit rewards businesses for improving how they work. If your company is developing or improving a product, process, formula, or software, and if that work relies on technical experimentation or uncertainty, your organization may be eligible. The key phrase here is “technical experimentation or uncertainty.” It’s not about invention, it’s about innovation.
Examples of qualifying initiatives or activities include:
Developing new fuel blends or biofuel formulations;
Improving automation or control systems in terminals;
Enhancing logistics or delivery systems for efficiency and compliance;
Designing or integrating data systems to track and optimize operations; and
Testing new environmental or safety technologies.
These are common, day-to-day activities in modern fuel distribution operations, and they often qualify for the credit.
Fuel distributors and convenience retailers operate at the intersection of technology, logistics, and regulation. Innovation in the fuel distribution industry has evolved rapidly. As companies modernize systems, streamline operations, and adapt to shifting regulations, they often engage in the kind of experimentation and technical advancement that defines R&D activity.
Consider a few specific areas where the credit often applies:
Automation and Process Improvements: Companies investing in automated inventory systems, fuel tracking software, or integrated logistics platforms often conduct significant technical testing and refinement as part of the implementation of such improvements. If your team worked with engineers or IT professionals to create or adapt these systems, that effort may qualify.
Environmental and Safety Compliance: The shift toward cleaner fuels, vapor recovery systems, spill prevention, and emissions monitoring has required distributors and others in the industry to adapt technology and infrastructure. Experimenting with new containment systems, additive technologies, or monitoring solutions frequently meets the IRS’s definition of qualified research.
Fuel Blending and Additives: Developing new fuel blends, improving octane efficiency, or testing additive formulations can all generate qualified research expenses. Many downstream companies perform this work in collaboration with suppliers or equipment vendors, yet still qualify for the credit.
Data Integration and Software Development: Fuel distributors increasingly rely on customized ERP and real-time reporting systems. If your company has developed or customized software to streamline these functions, those programming and testing activities likely qualify as R&D.
Equipment Design and Facility Upgrades: From customizing delivery equipment to redesigning loading rack systems or upgrading tank monitoring technologies, distributors frequently engage in engineering work that involves technical uncertainty, another hallmark of qualified R&D.
The R&D Tax Credit is calculated based on qualified research expenses (“QREs”), which typically include:
Wages paid to employees directly engaged in, supervising, or supporting qualified research;
Supplies used in the research process (testing materials or prototypes);
Contract research expenses (up to 65% of payments to third parties); and
Certain costs related to developing and testing software.
In many cases, the credit can equal 6–10% of qualified expenses. For small and mid-sized businesses, that can mean tens or even hundreds of thousands of dollars in savings. Large companies could potentially save millions. And for startups or pass-through entities, the credit can be applied against payroll taxes, which can be a major benefit for growing operations.
To illustrate: Suppose an organization incurred approximately $1,000,000 in total qualified research expenses during the development of a new automated distribution system. Of that, about $700,000 represented employee wages (engineers, programmers, and supervisors), $200,000 went to outside software consultants, and $100,000 covered testing and related materials. After applying the federal R&D credit, the company could generate a federal tax credit of roughly $60,000 to $100,000. For companies in states with their own R&D incentive programs, such as Minnesota, the combined federal and state credits can substantially enhance the return on every dollar invested in innovation.
Keep in mind, this is not a deduction. It’s a dollar-for-dollar reduction of tax liability. For pass-through entities, the benefit can offset owners’ income taxes, and for eligible small businesses, it can be used to offset up to $250,000 per year in federal payroll taxes. In other words, what began as a software improvement project aimed at increasing efficiency could also generate a significant cash benefit that directly supports reinvestment in operations and technology.
Despite the credit’s broad applicability, many companies overlook the R&D tax credit due to persistent myths:
“We don’t have a lab.”
That’s fine. The credit doesn’t require a lab or formal R&D department. Field testing, process improvements, and software development all qualify.
“We didn’t invent anything new.”
The credit rewards improvement, not invention. Enhancing an existing process, even incrementally, counts.
“We outsource that work.”
Businesses can often claim a portion of expenses paid to outside consultants or engineers, even if they aren’t employees.
“It’s too complex to bother with.”
While documentation is key, experienced advisors (like our firm’s tax credit team) can handle collecting data, substantiating claims, and filing.
The IRS has made clear that while the credit is generous, it’s also documentation-driven. Companies must be able to demonstrate that their projects meet four criteria known as the “Four-Part Test”:
Permitted Purpose: The project aims to improve a product, process, formula, or software.
Technological in Nature: The work relies on physical or biological sciences, engineering, or computer science.
Elimination of Uncertainty: The company faced technical uncertainty in the planning stages about how to achieve its goal.
Process of Experimentation: The company tested, evaluated, and refined potential solutions.
Maintaining project notes, design iterations, meeting summaries, and payroll records can make the difference between a smooth claim and a challenging one. A well-documented R&D study, often conducted with the help of your legal and tax advisors, ensures compliance and helps to maximize your potential benefit.
In addition to the federal credit, more than 35 states offer their own R&D tax incentives, which often stack on top of federal benefits. For multi-state distributors, each jurisdiction’s rules may differ, but coordinated filing strategies can unlock cumulative benefits that span operations.
The landscape for R&D incentives is shifting again, this time in a direction that makes the credit even more valuable. After several years of uncertainty surrounding application of the Section 174 capitalization rules under the Internal Revenue Code, Congress appears poised to restore the ability for businesses to immediately expense domestic R&D costs rather than amortizing them over multiple years. That change will bring much-needed clarity and cash flow relief to companies investing in technical improvements here in the U.S.
This renewed emphasis on R&D expensing is part of a broader policy effort to stimulate domestic innovation and manufacturing. Lawmakers on both sides of the aisle have recognized that encouraging technical investment is critical to maintaining U.S. competitiveness. In short, the federal tax code is being recalibrated to reward innovation at home, not just in traditional technology sectors, but across industries – including energy distribution and logistics. For fuel distributors, convenience operators, and others across the industry, these shifts come at a pivotal time. The industry is navigating rapid digital transformation, environmental transition, and market volatility, all areas that demand experimentation, engineering, and adaptation. Leveraging the R&D Credit, particularly in light of evolving expensing rules, isn’t just about managing taxes; it’s about positioning your business to capture federal incentives designed to fund the next wave of operational innovation.
For companies new to the R&D Credit, the best starting point is a “qualitative assessment.” Connect with your finance, operations, and engineering leaders to identify:
Projects that involved (or will involve) process or software development;
Efforts to improve efficiency, safety, or compliance;
Customizations or integrations of technology systems;
Personnel involved (both internally and externally) and approximate time invested.
From there, your advisors can conduct a quantitative analysis to estimate the potential benefit and determine whether a formal claim makes sense.
The fuel distribution industry may not look like Silicon Valley at first glance, but innovation is happening every day. Whether it’s upgrading systems, adopting AI-driven logistics tools, or testing renewable fuel blends, companies are experimenting, adapting, and evolving. The R&D Tax Credit is designed to reward exactly that kind of progress. By recognizing and capturing qualifying activities, distributors and retailers not only reduce their tax burden, they support reinvestment in the innovation that keeps the industry moving forward.
Max ShapiroAttorney
Candice LongStrategic Tax Advisor
Winthrop & Weinstine is a full-service law firm that serves as general counsel to SIGMA. For more information, contact Tami Diehm, 612-604-6658 or Jim Dierking, 612-604-6651.
