What Kind of Research and Development Activities are Eligible?
Any corporation, organization, trust, estate, or individual can claim an R&D tax credit for three prior tax years and on a go-forward basis if they are involved in conducting activities generally outlined below:
R&D credit – qualified activities:
- Activities that are technical in nature or that involve design, development, or improvement of new or existing:
- Processes
- Products
- Techniques
- Formulas
- Inventions
- Software
- Development efforts must include activities focused on improved:
- Performance
- Functionality
- Reliability
- Quality
- Qualifying expenditures can include:
- U.S. wages (including supervising and support staff)
- U.S. contractor costs
- Materials and supplies used for R&D
- Cloud computing development expenses
Find out what activities from your industry qualify below
The Four-Part Test
Established by the IRS, a four-part test outlined in IRC 41 (d) can help you to identify whether your company’s research and development activity qualifies for the R&D tax credit.
#1: New or Improved Business Component
The activity must create a new or improved business component defined as a product, process, formula, invention, software, or technique. The development efforts of the new or improved business component must focus on improving the function, reliability, quality or performance. These efforts and expenses behind the improvement or innovation do not need to be new to the world, but rather innovative and new to your business.
#2: Elimination of uncertainty
The intent of the activity must be to discover information that seeks to eliminate uncertainty concerning the capability, appropriate design, or methodology of the process or product in question. Put simply, changing something purely for cosmetic, style, taste, or season design factors would not be eligible for claiming the R&D tax credit for those development efforts.
#3: Process of experimentation
A qualifying activity must demonstrate the evaluation of alternatives for achieving the desired result through the elimination of uncertainty. This might include processes such as simulation and modeling, systematic trial and error, and iterative designs in which alternative approaches and methods are trialed throughout the development lifecycle. This can include but not limited to alternative materials, dimensions, orientation, and configurations to ultimately improve the performance, quality, reliability and functionality of the product or process of interest.
#4: Application of scientific principles
The activity must rely on fundamental technological principles and be rooted in the hard sciences. Examples include but are not limited to engineering, biology, physics, chemistry, agronomy, civil engineering, environmental remediation, and computer science.
What Types of Businesses Can be Eligible?
Simply select an industry or sector to find out more about what qualifies for R&D tax relief:
