IMA Tax Policy Blog

4 Steps to Qualify for R&D Tax Credits

CDH, PC is an IMA Member

Many people think that R&D tax credits only apply to companies that require lab coats to be worn at the office. But the definition has evolved greatly over the years to include not only companies that manufacture and develop software, but companies in various other industries and start-ups companies without revenue.

Does your client pass the “4 Part Test” to qualify for R&D tax credits? It’s easier than you think.

The company must:

  1. Develop or improve a product or manufacturing process
  • Functionality
  • Performance
  • Reliability
  • Quality
  1. Rely on the principles of any hard science
  • Engineering
  • Software or hardware development
  • Physical Science
  • Biological Science
  1. Attempt to eliminate uncertainty

In other words, there needs to be a technical challenge or issue that needs to be resolved before the new or improved product or manufacturing process can be achieved. Often times the uncertainty is related to how you achieve your goal (i.e. which design or alternative will work), not if you achieve your goal.

  1. Undergo a process of experimentation
  • Modeling, simulation, trial and error testing
  • Develop one or more hypotheses (design alternative or prototyping)
  • Design and conduct experiments to test and analyze hypotheses
  • Refine or discard hypotheses to design end result

Tax credits can help generate cash flow by offsetting taxes owed or paid. Given recent tax law changes, the R&D tax credit remains one of the few substantial ways for companies to reduce their tax liabilities. So maximizing this benefit is critical. Outsourcing to a specialized company, like SourceHOV Tax, that can invest the time and resources required to understand a company’s R&D activities and specific tax situation can help ensure R&D credits are maximized.

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