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

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 creating or improving 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.
• Technical Uncertainty: Technical unknowns about appropriate design, capability, or method have been pursued since the project's inception.
• Process of Experimentation (PoE): The activities support a systematic PoE 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 regulations;
• 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?

  • Sign up for our free, fast, 15-minute webinar (live from Arizona!) next Tuesday, December 3 to learn about critical updates, now in effect for tax year 2024.

  • Can’t make it? Read  “Sunny Skies and Cold, Hard Cash,” our recent article on the topic.

• 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.

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

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