What is a Qualified Research Activity?

By May 31, 2017 R&D Tax Credits

For an activity to qualify as a Qualified Research Activity (QRA) it has to fulfill the “IRS Four-Part Test”. The “IRS Four-Part Test” has four requisites:

  1. New or Improved Business Component
  2. Technological in Nature
  3. Elimination of Uncertainty
  4. Process of Experimentation

The following list enumerates several activities that may in whole or in part constitute as a qualified research activity:

  1. New product development
  2. Product development
  3. New process development
  4. Process development
  5. Design engineering
  6. Prototyping and modeling
  7. Use of new materials and compounds
  8. Validation testing
  9. Trial runs to validate a new or improved product or process
  10. Testing to conform to regulatory requirements
  11. Performing structural calculations
  12. Developing architectural solutions
  13. Discussing technical concepts
  14. Computer modeling
  15. Unsuccessful projects and efforts

The list below describes activities that are not considered qualified research:

  1. Research after commercial production
  2. Reverse engineering
  3. Management activities, efficiency surveys and market research
  4. Routing data collection and quality control
  5. Internal-use software development that doesn’t meet the “High Threshold of Innovation” test
  6. Studies related to efficiencies, operations, and profitability
  7. Foreign research
  8. Research in the social sciences, arts or humanities
  9. Trial runs that aren’t related to validation
  10. Debugging flaws in a business component
  11. Style or consumer taste research
  12. Training
  13. Installation
  14. Funded research (except within a controlled group)
  15. Duplication of existing business component

We also have to take into account who performs the qualified research. The following categories delineate who qualifies and who doesn’t:

  1. General Qualifying Activity
    1. Direct Supervision
      1. Senior engineer, mentor or subject matter expert
    2. Direct Support
      1. Janitorial cleaning – experimental equipment
      2. Administrative assistant – typing up research notes or recording design meeting minutes.
  2. General Non-Qualifying Activity
    1. Senior Management
      1. CEO, CFO, President or HR Director
    2. General Support Personnel
      1. Payroll staff
      2. Janitorial staff – cleaning general office space outside of laboratory

The employees who conduct “General Qualifying Activity” generally perform their qualified research in the following places:

  1. R&D Departments
  2. Laboratories
  3. Design Departments
  4. Engineering Departments
  5. Production/Manufacturing Departments
  6. Fabrication Departments
  7. Machine Shops
  8. Quality Control
  9. IT Departments

Think your company’s expenses conducts qualified research activities? Send us an email at [email protected] or visit the Indago website www.indagotax.com to learn more about the Research and Development Tax Credit.