Several stages and activities are involved in the research and development of a product, process or service in order to create them. Some of these stages generally qualify as qualified research activities (QRAS), but others don’t meet the IRS Four-Part Test threshold. In order to obtain the Research and Development Tax Credit, your company should be meeting the requirements of the “Four-Part Test”.
As a recap, to meet the IRS Four-Part Test, an activity must meet all four items 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.
As mentioned above, some activities within the research and development process are considered QRAs and qualify for the Research and Development Tax Credit and others don’t pass the threshold.
The following production activities generally qualify as QRAs:
- concept development
- applied research
- first run tests
These activities can apply to a variety of industries such as: engineering, software and tech, environmental and life sciences, and manufacturing and design. The following production activities generally are considered non-qualifying: full production, life cycle management, sales and marketing.
The following industry examples will illustrate the QRA explanation made above. In the manufacturing industry, improvements to processes and quality and reduction of defects in a product are considered QRAs, whereas the management of these processes or products won’t surpass the IRS Four-Part Test threshold. Moreover, in the food industry, improvements to flavor emulations and testing ingredient replacements are considered a “process of experimentation”. On the other hand, the marketing and selling activities to promote this new product won’t be recognized as “technological in nature”.
Think your company’s expenses conducts qualified research activities? Send us an email at email@example.com or visit the Indago website to learn more about the Research and Development Tax Credit.