It’s no secret the Research & Development (R&D) tax credit offers potentially significant cost savings for your business, as well as increased cash flow, a reduced federal tax rate, and dollar-for-dollar income tax reduction. However, if you plan on claiming the R&D tax credit, your Qualified Research Activities (QRAs) and Qualified Research Expenses (QREs) will have to pass the Four-Part Test.
Four-Part Test Checklist
Any company that wants to claim the R&D tax credit must satisfy each of the below criteria of the IRS Four-Part Test (IRC §41(d)). This applies to every company regardless of size, industry, or revenue.
1. Business Component Test
A business component is defined to be “any product, process, software, technique, formula or invention used by the taxpaying company in trade or business.”
This means the qualified research activity needs to be related to the quality, performance, reliability, or new or improved function of a business component of the taxpaying company.
2. Technological Uncertainty Test
The qualified research activity must involve the elimination of uncertainty. An activity entails uncertainty if the taxpayer did not know one or more of the following:
- Whether the desired results could be achieved
- The specific means of achieving the desired result
- The appropriate design of the business component being developed
3. Process-of-Experimentation Test
“Substantially all” of the activity must involve a “process of experimentation” involving more than one possible approach toward achieving the result, where the capability or method of achieving the result is uncertain at the outset of the activity.
4. Technological‐in‐Nature Test
Any qualified research activity that is performed to discover information is required to be technological in nature. This means any experiments that are used to eliminate uncertainty must rely on principles of physical or biological sciences, engineering, or computer science.
In relation to the above, qualified research expenses can include employee compensation, materials, and contracted services.
Which Industries Qualify?
The R&D tax credit can be applied to a wide variety of industries, including (but not limited to):
What are the Specific Qualifications for Claiming the R&D Tax Credit?
If your business activities pass the Four-Part Test, you’ll still need to meet the below qualifications in order to claim the R&D tax credit:
- Have 5 years or less in revenue
- Have less than $5 million in revenue in the current year
- Have conducted qualifying research activities and expenditures
If your business paid for any of the below, you might also qualify:
- Employees or sub-consultants performing research
- Raw materials
- Consumable supplies during development
- Cloud computing services related to development operations
Claiming the R&D Tax Credit
You’ll need to file IRS Form 6765 - Credit for Increasing Research Activities to claim the R&D tax credit. This can be done on either your timely filed tax return (including extensions for a given year) or by amending prior returns to claim the credit. For amended tax returns, this can typically be claimed for the previous 3 years. However, claiming the R&D credit can be complicated without help from professionals.
How We Can Help
GOAT.tax is powered by Source Advisors, a leading tax consulting firm providing R&D tax credits for over 4 decades. Source Advisors can assist your small business with:
- Identifying your qualifying development activities and expenses
- Computing your R&D tax credits
- Preparing any supporting documents that are needed
- Assisting with the payroll tax offset
Founded on the basic principle that the R&D tax credit should be available to companies of all sizes without fees burdening the benefit, the GOAT.tax automated software platform is backed by 350+ years of collective R&D tax credit experience. This is what sets us apart from any other platform. Our people and our experience.
Now is a good time to reexamine prior, current, and future R&D activities in order to take advantage of the R&D tax credit, regardless of industry. If you think your company might be performing work that qualifies, don’t let the potential tax savings go unclaimed. GOAT.tax can help you claim vital tax savings to reinvest in your business and fuel your next big project.
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