How to Qualify for R&D Tax Credits: The Four-Part Test
Once you know what the R&D tax credit is all about, how do you know if your activities are eligible?
Meeting the Four-Part Test
The R&D tax credit incentivizes certain research activities by reducing a company’s liabilities for spending money on that research. The credit is equal to a certain percentage of a business’ qualified research expense (QRE) in excess of a base amount. Expenses that qualify are more comprehensive than you may think—QREs can include the salaries of employees and supervisors who are conducting research, supplies and even some of the research that is contracted out.
A simple four-part test helps to determine qualified R&D activity. R&D tax credit eligibility largely depends on whether the work you are conducting meets the criteria established by the IRS in its four-part test:
1. Develop a New or Improved Business Component (Product or Process)
- You must create a new product, process technique, formula, invention, patent or software, or improve an existing one
- You must improve performance, functionality, quality, reliability or cost
2. Technological in Nature (The Discovering Technological Information Test): The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology
or computer science.
3. Elimination of Uncertainty: You must demonstrate that you’ve attempted to eliminate uncertainty about the development or improvement of a product or process.
4. Process of Experimentation: You must demonstrate – through modeling, simulation, systematic trial and error or other methods – that you’ve evaluated alternatives for achieving the desired result.
A professional R&D tax credit expert – and the IRS – will determine the number of R&D tax credits you qualify for based on the specific industry and qualifying activities. Federal and state filing requirements vary, so be sure to work with your tax credit professional on supplying the required documentation to each government entity.
For more information or to request a free assessment to determine your company’s qualifying R&D tax credit eligibility, please contact your Marcum representative at (855) MARCUM1.