To qualify for the R&D Tax Credit an activity must meet all four criteria of the “Four-Part Test”. The IRS Four-Part Test requires: a new or improved business component (product, process, technique, invention, formula or software), the business component to be technological in nature, some kind of elimination of uncertainty, and a process of experimentation.
Let’s review each criteria of the IRS Four-Part Test:
Conducted for a permitted purpose
The qualified research activities (QRAs) must result in a new or improved level of function, performance, reliability or quality. A simple change in the product’s aesthetics doesn’t fulfill this criterion. The candidates need to design, develop or improve products, processes, techniques, inventions, formulations or software to qualify for the Research and Development Tax Credit.
Technological in nature
The research and activities must be based on one or more of the following sciences:
- Engineering: Architecture, Defense Contracting, Engineering (All Disciplines), Telecommunications, and Aerospace.
- Software: IT/Software Development, Startups, Website Advertising and Marketing, and Internet Applications.
- Manufacturing and Design: Apparel & Textiles, Brewing, Distillery, Winemaking, Consumer Food and Beverage, Foundry/Metals/Mining, Manufacturing, Oil and Gas, and Semiconductors.
- Environmental & Life Sciences: Agriculture/Farming, Life Sciences, Medical Devices, Pharmaceutical, Waste Management, and Recycling.
Intended to eliminate uncertainty
The QRAs must intend to eliminate uncertainties concerning the development or improvement of a product, process, technique, invention, formulation, or software. In our experience, any of the following uncertainties qualify:
- Capability Uncertainty: Can we do it?
- Methodology Uncertainty: How can we do it?
- Design Uncertainty: What is the correct design to achieve the goal?
Process of Experimentation
The process of experimentation is identifying and evaluating alternatives, performing trial and error experiments, and testing results. The IRS also considers “process of experimentation” when a candidate creates prototypes, models and simulations. Any failed projects, technological in nature, are also considered part of the process of experimentation.
If your company fulfills all of the “Four-Part Test” criteria email us at email@example.com for more information on how we can increase your company’s market value and boost its bottom line through the Research and Development Tax Credit.