The 4 Part Test You Need to Pass for Your R&D Tax Credits

4 part test diagram

In 1981, the federal government initiated the Research and Experimentation tax credit in an effort to create jobs and innovation in the U.S. The R&D tax credits were intended to be a temporary incentive to boost the economy. However, the program has been extended by Congress more than a dozen times until it was made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015. 

Initially, the tax program was exclusive to necessary research expenses that typically occurred in a laboratory setting. However, modifications to the credit qualifications have made it available to a variety of businesses. 

R&D tax credit eligibility depends on the type of the work being conducted, and if it meets the IRS established criteria:

  1. Purpose: The research is done to improve the quality, function, or reliability of a process or product.
  2. Process: The research activities must involve stimulation, logical trial and error, assessing alternatives, and refining hypothesis.
  3. Uncertainty: The qualified activities must identify information to remove ambiguity in the development or improvement of a production process.
  4. Nature: The research done relies solely on physical sciences, biological sciences, computer sciences, or engineering.

What activities meet this 4-part test?

Here are some examples of qualifying research activities:

  1. Testing of new technology or concepts in your industry
  2. Creation of models or prototypes
  3. Productions of new, or improved versions of products, systems or formulas
  4. Developing or applying for patents
  5. Adding in equipment that improves upon a process
  6. Developing new software
  7. Designs for LEED/green initiatives
  8. Environmental testing
  9. Concept and designing of HVAC

Your National Tax Group qualified R&D tax credit expert can help you determine if your business activities meet the necessary criteria of the test by conducting a tax credit study. You can find out more information on how to get your personalized report here. 

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