Scope of R&D Tax Credit Eligibility
Sample of R&D Industries
THINGS TO CONSIDER BEFORE TAKING THIS JOURNEY ALONE?
Activities Must Meet The Four Tests
I. Business Component Test
The activity must relate to a new or improved product, process, software, or technique that improves:
- Function
- Performance, Reliability
- Cost Position
- Quality
II. Technical Uncertainty Test
An activity entails uncertainty if the taxpayer did not know one or more of the following:
- Whether or not the desired result could be achieved.
- The specific means of achieving the desired result.
- The appropriate configuration of the business component being developed.
III. Process of Experimentation Test
The activity must involve a process of experimentation in which more than one possible approach toward achieving a desired result was attempted or evaluated, and where the capability or method of achieving the result is uncertain at the outset of the activity.
IV. Technological in Nature Test
The activity performed must rely fundamentally on the principles of engineering & sciences:
- Physical Science
- Biological Science
- Computer Science
- Engineering
Contract Language Matters
- The company carrying out the work must bear the financial risk
- Fixed-price contracts – maximum economic risk
- Time and Material contracts – don’t qualify, but overage may create an economic risk
- Payment is contingent on the success of the research
- Taxpayer retains “substantial rights” in the research
ARE YOU COVERED?
The IRS will look for documentation and substantiation in these areas:
- Inadequate contemporaneous documentation
- Biased judgment samples - showing only R&D employees
- Exaggerated wage allocations – CFO & Marketing Officers
- Companies pay a percentage of credit to a practitioner
- Recent cases Leon Max and Siemer Milling