Follow These Best Practices And Eligibility Rules To Qualify For The R&D Credit
Companies that invest in research and development activities to develop new or improved business components (product, process, technique, formula, invention, or software) can qualify for the R&D credit under Internal Revenue Code (IRC) Section 41 and can receive a tax credit of as much as 20% of qualified research and development expenses.
In order to properly and accurately document your R&D tax credits it’s critical that companies follow best practices to fully comply with the many rules and regulations surrounding the R&D credit. The following information defines what is “research” according to the tax code and what activities will be considered eligible.
Research and development activities are more than just activities performed in a laboratory, conducting blue sky research new to the world. The “research” definition is much more broad and general and only has to meet the four-part test:
- Permitted Purpose: The activity must be intended to develop or improve a business component’s (product, process, technique, formula, invention, or software):
- Reliability, or
- Technological in Nature: The activity performed must not rely on any social sciences and instead, must fundamentally rely on principles of: Physical science, Biological Science, Computer Sciences, or Engineering.
- Elimination of Uncertainty: The activity must be intended to discover information to eliminate technical uncertainty concerning the capability or method for developing or improving a product or process, or the appropriateness of the business components design.
- Process of Experimentation: Substantially all of the activities must be elements of a process of experimentation: The activities must involve the evaluation of one or more alternatives to achieve a result where the method of achieving that result is uncertain. Activities should include designing experiments to evaluate and test alternatives through processes of systematic trial and error, simulation, or modeling.