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 – Is It Brainy Enough?
For the activity to qualify, it must be determined by engineering, physical sciences, biological sciences, or computer science principles. This means the work must be grounded in hard sciences and systematic methods to achieve the intended purpose.
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.
Automated Software vs. Traditional R&D Tax Credit Consulting
GOAT.tax was created to educate businesses on the R&D tax credit and help those who qualify successfully claim it on their own. Our nationwide team has over 350 years of collective R&D tax credit experience, and our mission is to take the guesswork out of this credit so you can focus on your core business.
The Three Types of Research and Development
Businesses should consider claiming the Research and Development tax credit for various reasons, but eligibility must be determined and three types of R&D align with the business's nature.
Common Challenges When Claiming R&D Tax Credits
Although claiming this credit can offer considerable benefits for companies engaged in R&D efforts, the process can be challenging.