R&D Tax Credit: The 4-Part Qualification Test Explained

SEPTEMBER 15, 2020

12:00 AM

By Kaneez Fizza

The R&D Tax Credit is a federal incentive that rewards innovative companies that improve or develop a new product and/or process. To determine credit eligibility, the IRS has implemented a simple four-part test. A business is performing qualified R&D activity if it meets all of the following criteria:

1. Permitted Purpose (or Qualified Purpose/Business Component Test)

An activity intended to develop new or improved business component:

  • Improves function, performance, quality, or reliability
  • It could be a product, process, technique, formula or software

2. Elimination of Uncertainty

An activity intended to eliminate technical uncertainty concerning:

  • Capability
  • Optimal methodology
  • Appropriate design
  • Process or product improvement

3. Process of Experimentation

Implementation of a systemic approach to identify and evaluate different alternatives to achieve a desired result by:

  • Trying different technologies
  • Several iterations
  • Modeling and simulation

4. Technological in Nature

Application of hard sciences principles, such as:

  • Engineering
  • Physics
  • Chemistry
  • Computer Sciences
  • Other disciplines

If you are not sure whether your business passes the 4-part test, reach out to us today. The R&D Tax Credit legislation is much broader than people often assume. Several industries perform R&D activity on a daily basis without realizing it.

About Leyton:

Founded in 1997, Leyton is one of the world’s largest innovation funding specialist helping our clients improve their global performance. In the US, our specific expertise is in the optimization of Federal and State Research and Development (R&D) Tax Credits. Our dedicated industry teams are comprised of highly experienced scientists, engineers, tax accountants, and attorneys, all of whom are motivated to help your business robustly claim and realize the R&D credit to incentivize further innovation investment. 

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