What is the 4-Part Test for Claiming R&D Tax Credits?

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.

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.

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.

Maximizing Cash Flow Through Government Tax Opportunities

Amid the ongoing challenges posed by COVID-19, numerous small and midsize businesses are grappling with maintaining cash flow, operational capabilities, and their internal research and development initiatives. While the Coronavirus Aid, Relief, and Economic Security (CARES) Act did extend financial aid to these COVID-19-affected enterprises through emergency grants, retention tax credits, and forgivable loans, these solutions offer only temporary cash flow relief, falling short of providing lasting solutions.

Deb Roth

August 14, 2023

Understanding the R&D Tax Credit Carryforward Period

The R&D Tax Credit Carryforward Period refers to the duration during which unused portions of research tax credits can be applied to offset future tax liabilities. This provision is often overlooked by many taxpayers who are eligible for R&D Tax Credits. In most cases, companies that have qualified research expenses but lack current income can carry forward these credits to offset taxes on forthcoming profits. The carryforward period allows credits to remain applicable for up to 20 years. Additionally, the option to carry back credits for the previous year is also available.

Deb Roth

August 14, 2023

Are R&D Tax Credits Convertible to Cash?

Navigating the world of R&D Tax Credits often prompts the question: Can these credits be converted into cash refunds? It's a query frequently posed by businesses seeking to maximize their returns on research and development investments. While R&D Tax Credits themselves aren't inherently refundable, they can still yield a financial windfall in the form of cash benefits.

What is the 4-Part Test for Claiming R&D Tax Credits?

Four-Part Test Checklist

1. Business Component Test

2. Technological Uncertainty Test

3. Process-of-Experimentation Test

4. Technological‐in‐Nature Test

Which Industries Qualify?

Aerospace

Tool & Die

Metal Fabrication

Plastics & Injection Molding

Consumer Products

Manufacturing

Architecture & Engineering

Food & Beverage

Financial Services

Mortgage & Banking

Software Development

Chemical

Contract Manufacturing

Construction / MEP

Pharma

Oil & Gas