R&D Tax Credits Four Part Test

R&D Tax Credits Four-Part Test

If you landed on this post, you might be wondering how your company might be able to qualify for the R&D Tax Credits.

The below outlines each area of the R&D Tax Credits Four-part Test.

The Four Parts You Need To Pass In Order To Qualify For The R&D Tax Credits

1.

First, the company needs to be trying to develop a new or improved “business component.” – (these do not need to be successful endeavors) As defined in the IRS regulations, the business components include a product, process, technique, invention, formula or software.

2.

Second, the activity needs to be technological; in other words, it needs to involve the hard sciences, like engineering, physics, biology, computer science or chemistry.

3.

Third, there needs to be some uncertainty at the onset when the company is trying to develop a new or improved business component. However, there only needs to be uncertainty regarding one of three things: 1. Can they do it?, 2. How would they do it?, 3. The ultimate or appropriate design of what they are trying to develop.

4.

Fourth, the company needs to be evaluating different alternatives when it is trying to develop the new or improved business component. Examples of this include: Systematic trial and error, modeling, and simulation.

Costs That Qualify For The Credit

R&D expenditures used to calculate the R&D tax credit include the wages paid to employees for engaging in qualifying R&D activity within the US, including direct supervision and direct support of such activities. Also, up to 65% of outside contractor costs associated with qualifying R&D activities can count towards the credit calculation as well, as long as the contractors are based in the US.[1]

1. Audit Techniques Guide: Credit for Increasing Research Activities (i.e. Research Tax Credit) IRC § 41* – Qualified Research Expenses
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