You are using an outdated browser. For a faster, safer browsing experience, upgrade for free today.

Loading...

Research and Development Eligibility

To take advantage of this R&D Tax Credit, a firms Qualified Research Expenses (known as QRE’s), must pass a rigorous four-part test. The QRE’s are made up of three components: Wages, Supplies, and Contract Research. Each of the component categories included in the QRE’s must pass the rigid Four-Part Test criteria. Contact us below to schedule a call to determine if your business activities qualify.


Qualifying for R&D

R&D does not have to be new to the industry. It simply needs to be new to the company, which must have activities that meet the four-part IRS test.


What Is The 4 Part Test ?

The R&D efforts must pass a 4-part test to be eligible:

  • 1. Permitted Purpose: The work must be done to develop new (or improve existing) functionality, performance, reliability, or quality of a business component i.e. any product, process, technique, invention, formula, or computer software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.

  • 2. Elimination of Uncertainty: You must demonstrate that you have attempted to eliminate uncertainty about the development or improvement of a product or process. In other words, something that has been changed solely for aesthetic purposes would not qualify. Uncertainty exists if publicly available information and knowledge cannot be applied to achieve the desired result i.e. capability of development or improvement, method of development or improvement, or the appropriateness of the business component’s design.

  • 3. 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.

  • 4. Technological in nature: The process of experimentation must rely on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.

What Are QRE’s

The QRE’s are made up of three components: Wages, Supplies, and Contract Research. Each of the component categories included in the QRE’s must pass the rigid Four-Part Test criteria.

  • Wages paid to employees for qualified services (including amounts considered to be wages for federal income tax withholding purposes)
  • Supplies (defined as any tangible property other than land or improvements to land, and property subject to depreciation) used and consumed in the R&D process
  • Contract Research expenses paid to a third party for performing QRA’s on behalf of the taxpayer, regardless of the success of the research, allowed at 65% of the actual cost incurred
  • Basic research payments made to qualified educational institutions and various scientific research organizations, allowed at 75% of the actual cost incurred.

Qualified Research Activities?

  • Implementing new feature requirements based on customer feedback
  • Publishing newer versions of existing applications with new features
  • Adding new processes to the software to automate data transfers
  • Writing APIs to integrate with third party applications Enhancing reliability and speed of specific processes

You know how expensive it is to code in the US vs outsourcing to India and Eastern Europe. Congress wants you to keep jobs on American shores. The R&D Credit is designed to do just that!