Congress established a four-part test that defines qualified research activities associated with new and improved product and process development to exclude routine engineering.
Technological in Nature
Activities must be based on a hard science such as physics, biology, chemistry and computer sciences. The activity cannot be based on the soft sciences which include psychology, humanities, arts or social sciences.
Designs related to the development activities must have inherent risks or uncertainties associated with their potential for success.
Process of Experimentation
This test, intended to exclude routine engineering, requires a process of theoretical or physical evaluation that can result in the development of design alternatives.
The goal of the activity must be to improve the fit, form, or function of a product or process. This does not include development directly related to aesthetic changes or technology that does not build on a company’s knowledge base.
Indicators of Qualified Research
The Research & Experimentation Tax Credit rewards efforts related to product/process development, product enhancement, process improvement, and software development. Typical indicators of qualified research include:
Degreed engineers or scientists on staff
Operates in a manufacturing industry
Patentable products or production methods
Has new/continuous improvements to products and/or processes
Operates in industry where prototyping is common
Is awarded government R&D projects, from program such as: SBIR, STTR
Engages in Continuous Quality Improvement efforts
Manufactures simple products in a highly automated system
Creates high warranty costs due to improper product/process design
Develops software using new algorithms, techniques or architectures
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