Do Your Activities Qualify for the R&D Credit? What Counts as Qualified Research Activities

What activities in your business can qualify you to claim the research and development tax credit?

When it comes to running a business, every dollar saved counts. Have you ever wondered if your company could be missing out on valuable tax savings in the form of tax credits? The good news is, many businesses qualify for significant tax credits through research and development activities. In this post, we’ll focus on the first of our two-lens approach: Qualifying Research Activities (QRA). Once you understand this lens, you’ll be ready for lens two (which is about expenditures) in our follow-up.

What Are Qualified Research Activities?

A Qualified Research Activity is an activity that is done in a business and qualifies toward the R&D Credit. These activities are the “what you’re doing” side (the other lens focuses on “what you’re spending”). The primary legal foundation for a QRA comes from the four-part test in the Internal Revenue Code Section 41.

Here are the four parts of the test (which is an "and" test; your business must meet each section of the four-part test.)

• Business Component Test: The activity must relate to a “business component”, a product, process, software, technique, formula or invention that your business intends to develop, improve, sell, lease or license in its trade or business.

• Elimination of Uncertainty: There must be technical uncertainty at the outset; either uncertainty about what the method is to develop or improve the business component, or uncertainty about the appropriate design.

• Process of Experimentation: The activity must involve an iterative process (trial and error, modeling, prototyping, simulation, etc.) to resolve that uncertainty.

• Technological in Nature: The activity must fundamentally rely on principles of the hard sciences (engineering, physics, computer science, biology, chemistry, food science, etc.) rather than simply routine business functions.

If any one of these tests isn’t met, then that activity may not count under the QRA lens.

Common Examples of Qualifying Research Activities

Here are some real-world examples of what kinds of activities we often see qualify for the credit (and hence count as QRAs). If your business is involved in these types of activities, you may want to schedule a complimentary consultation with Tax Credit Collective to determine if you can claim the R&D credit:

• Developing or engineering a new or improved product, process, formula or software.

• Evaluating the feasibility of alternatives (different materials, different manufacturing processes, alternative software architectures).

• Creating prototypes, beta-testing, modeling or simulation in order to test design alternatives and reduce risk.

• Improving an existing manufacturing process in a way that affects reliability, quality, performance, cost reduction (not just routine maintenance).

What Activities Do Not Qualify for the R&D Credit?

It’s equally important to recognize what "stuff and things" do not count, because the wrong assumptions can lead to audit risk or pursuing an overly aggressive position. Here are some typical “non-qualifying” activities:

• Routine testing, debugging, quality-control, or refining a product once commercial production has begun.

• Research conducted outside the U.S. (In recent years, many businesses have begun to offshore - or near-shore - their research activities.) Remember, the U.S. wants to incentivize innovation on U.S. soil.

• Activities whose sole purpose is social sciences, business management methodology, market research or sales promotion.

• Reverse engineering an existing product or process that is already commercially available.

  
  

Why This Lens Matters

From a practical standpoint here’s why focusing on the “activities” lens is so useful:

• It allows you to identify whether your work is eligible before you even look at the dollars spent. If the activity doesn’t meet the four-part test, spending on it won’t matter.

• It supports robust documentation. When you’ve identified which projects and activities satisfy the four-part test, we can identify the people and time involved and the scope of work undertaken.

• It sets you up for the second lens (expenditures) with clarity. Once you know “what” qualifies (activities), you can delve into the cost side (wages, supplies, contract research) with confidence.

Taking the Next Step to Unlock Savings

If you haven’t explored the R&D credit before, now is the perfect time. Many businesses leave money on the table simply because they don’t know they qualify or how to claim the credit.

Consider calling us or scheduling a complimentary consult to review your unique situation.

By taking these steps, you can unlock valuable tax savings that support your growth and innovation. Don’t wait - the sooner you act, the sooner you can reinvest those savings into your business.

Maximizing your research tax savings is not just smart - it’s essential for staying competitive and fueling future success.