This IRS 4-part test provides a crucial framework for business owners and financial professionals to determine a company’s eligibility for the Research and Development (R&D) tax credit. Uniquely designed to incentivize and support innovation and technological advancement within multiple industries, the R&D tax credit offers financial benefits to qualifying corporate entities.
What to Know About the 4-Part Test
Each year, countless eligible organizations fail to file for the credit for a wide variety of reasons. Some businesses simply don’t know about the R&D tax credit. Some assume their business is too small to tap into the benefits of the credit. Still, others believe that their operations or industries disqualify them from the benefit. The 4-part test helps detail protocol and eliminate any confusion about requirements to ensure all qualifying companies have access to the R&D tax credit.
Here are some important details about the 4-part test you should know to help determine if your business is eligible, beginning with each of the four parts:
The first part of the test assesses the primary purpose of any given research activity to determine if it’s used to create new or improved functionality, performance, reliability, or quality of a business component. Activities that may serve a permitted purpose may include (but are not limited to):
- Developing new software algorithms to improve a product’s efficiency
- Creating more durable materials
- Improving a manufacturing process
Technological in Nature
It’s not surprising that the R&D tax credit criterion emphasizes that the research must rely on the principles of science and technology. However, make no mistake — this part of the test does not limit access to traditional “white coat” laboratory operations and research. There are over 40 industries that may qualify with various activities, such as innovations in medical and technology devices, designs of renewable energy systems, and even advanced data analytics algorithms.
Elimination of Uncertainty
To satisfy this aspect of the 4-part test, a company must demonstrate that it attempted to eliminate technical uncertainty regarding the capability, method, or appropriate design at the beginning of the development project.
Process of Experimentation
The final criterion of the 4-part test requires that the company undergoes a systematic process of experimentation, which involves formulating hypotheses, testing various alternatives, and making iterations based on the results. Activities that may demonstrate a process of experimentation may include (but are not limited to):
- Prototyping new electronic components
- Conducting controlled experiments in manufacturing processes
- Refining software code to achieve optimal performance.
An R&D Tax Credit Accounting Firm Can Help You Make Sense of the 4-Part Test
Given the complexity of these criteria and the intricacies of applying them to diverse business scenarios, partnering with an accountant who specializes in the R&D tax credit is highly recommended. R&D tax credit accountants possess a deep understanding of the intricacies involved in claiming the credit and can provide invaluable guidance to business owners and financial professionals seeking to leverage this incentive.
An experienced R&D tax credit accountant works directly with business owners and financial professionals to identify all eligible research activities and expenses. They will also compile all the necessary documentation to support the claim. Your chosen partner will analyze all the details of a project to build a solid case for your business’s R&D tax credit application. Additionally, your R&D tax credit professional will align resources with a business’s financial advisor to ensure the credit is optimized within the context of the company’s overall tax strategy.
Contact Acena Consulting Today
Acena Consulting can help you determine if your business qualifies for the R&D tax credit. Schedule a consultation with our team of R&D tax credit experts today!