The United States government has long encouraged companies to invest in developing new or improved processes by providing certain tax incentives. For years, the Research and Development Tax Credit was a provision that required yearly re-confirmation from Washington. The recently passed Path Act of 2015 and the Tax Cuts and Jobs Act of 2017, made this tax incentive provision permanent.
Do You Qualify for the R&D Tax Credit?
Technical Risk and Economic Risk needs to be present. A company’s ability to claim the R&D Tax Credit is based on the risk of technical failure. The R&D Tax Credit rewards companies based on their attempt at designing or manufacturing a new product, not their success. In addition, a company must bear the economic risk of their product or process development as well. In other words, a company must get paid based on their success, not their attempts. Usually, companies are paid on a fixed-price basis which signifies that they bear the economic risk.
To qualify, projects must satisfy a 4‐Part Test including:
Product/Process Improvement – Activities that to a new or improved product or process that improves the component’s:
Elimination of Uncertainty – Activities meant to discover information to remove uncertainty regarding the capability or method for developing or improving a product or process, or the appropriateness of the product design.
Technological in Nature – Activities must fundamentally rely on principles of physical science, biological science, computer science, and/or engineering.
Process of Experimentation – Activities must follow a process of experimentation involving: evaluation of alternatives, confirmation of theories through trial & error, testing, modeling, and/or refining or discard of the hypotheses.
What Makes A Great R&D Opportunity? Examples of Qualified Activities
Advancing the design of an existing product or process.