Passing the Four-Part Test for R&D Tax Credits: The CFO’s Guide

5 Minute Read
Posted by Laura Whittenburg, MSBME, Technical Writer on Nov 27, 2024 2:14:14 PM

As a CFO, you're always looking to boost your company's financial performance. Did you know there are valuable federal and state tax credits for research and development (R&D)?

You may be thinking, "My company isn't in a high-tech industry. We don't have labs or scientists." R&D tax credits are available to a much wider range of businesses than you may expect, including those in agriculture, manufacturing, and software development.

If your company completes qualified R&D, then you may be eligible for the Credit for Increasing Research Activities (i.e., the federal R&D tax credit). Filing for this credit could offset significant associated expenses, including wages for qualified services and supplies.

American companies can claim this credit by documenting R&D activities, calculating qualified research expenses (QREs), and reporting the credit via IRS Form 6765 when filing their annual tax return.

But how do you know whether your business’ activities qualify as R&D?

What Exactly is R&D?

The Internal Revenue Service (IRS) defines qualified R&D for federal tax purposes in 26 U.S. Code § 41. Simply put, activities must pass what is colloquially called the four-part test.

Qualified research activities must pass each subtest:

  • Permitted Purpose: The goal is to create or improve business components – like products, processes, or software – for sale, lease, or license to taxpayers.
  • Technological in Nature: R&D is undertaken to discover information relying on “hard sciences” (i.e., chemistry, biology, and physics), computer science, and engineering.
  • Elimination of Uncertainty: Technical unknowns about appropriate design, capability, or method have been pursued since the project's inception.
  • Process of Experimentation: The activities support a systematic process of experimentation to achieve a desired outcome.
Introducing: The Four-Part Test Series

During the coming weeks, we will dissect each of the four-part test’s subtests, diving into greater detail about:

  • The deeper meaning of each subtest, informed by federal statutes and case law;
  • Examples of traditional and emerging activities passing and failing each subtest; and
  • Who you could ask at your company as you approach each subtest.

We also recommend that you ask us!

At Acena Consulting, R&D tax credits are our bread-and-butter business, 365 days a year. Our team of tax professionals includes CPAs and engineers who have partnered with hundreds of businesses, from startups to Fortune 500 companies. We’ve seen it all.

Schedule a free consultation today for immediate assistance from Randy Eickhoff, CPA, Acena's Founder & Head Coach.

Season’s Greetings!

Happy Thanksgiving and Native American Heritage Day from all of us at Acena Consulting! 🦃

  • Questions? Please email me at laura.whittenburg@acenaconsulting.com

  • Are you an Arizona business seeking the state’s refundable R&D tax credit?

  • Interested in building your professional fluency in R&D tax incentives? 

    • Sign up for our free, interactive webinar on December 17: “Cracking the (Tax) Code for R&D.”

      • This workshop provides one CPE credit for professionals keeping up with continuing education.

      • We’re eager to field any questions you may have about the four-part test.

    • Subscribe to our newsletter to explore the four-part test directly from your inbox.

//

Edited by Rae Smoltz, Project Manager at Acena Consulting. Photo courtesy of NASA Goddard Space Flight Center on Flickr.

Laura Whittenburg, MSBME, Technical Writer

Laura Whittenburg, MSBME, Technical Writer

Laura most recently hails from the worlds of medicine and pharmaceutical R&D. She attended a U.S. medical school where she conducted research in Anesthesiology and Acute Care Surgery, passed the USMLE Step 1 "Boards" exam, and completed clinical rotations before transitioning her career to scientific writing. She sports the color purple at an alarming frequency to celebrate her alma mater, Northwestern University, where she earned her Bachelor's in Biological Sciences and Master's in Biomedical Engineering. Away from her desk, Laura reads fantasy novels and plays with her two schnauzers, Lyra and Vivenna, who make guest appearances during her video calls.