Contrary to public perception, businesses don’t have to have workers in white lab coats and goggles to claim R&D tax credits. Any industry that is designing or developing innovative solutions, software products, formulations, or process improvements that satisfy the 4-Part Test requirements can be eligible as a Qualified Research Expense.
The R&D 4-Part Test requirements are summarized below:
Permitted Purpose: In simple terms, the purpose of the activity or project must be to create something new or improved product, process, software, invention, patent, or formula (referred to as a business component). The permitted purpose falls under a broad umbrella that includes improving functionality, performance, reliability, or quality of the business component.
Elimination of Uncertainty: The activities and project in question must attempt to eliminate uncertainty related to the optimal design, development methodology, or component’s capability to achieve the permitted purpose.
Process of Experimentation: Substantially all of the activities constitute elements of a process of experimentation. The activities must include a systematic evaluation of alternative solutions to eliminate the technical uncertainty through, for example, trial and error or a Product Development Lifecycle (“PDLC”).
Technological In Nature: The activities and process of experimentation must rely on the fundamental principles of hard science, including biological sciences, computer science, engineering, physics, or chemistry.
Read More about Qualified Research Expenses (QREs) here.