In this deep-dive series, we’re taking a close look at each part of the IRS four-part test to help companies understand if they qualify for the R&D tax credit. We previously examined how companies conduct activities that are technological in nature. Now, let’s look at what it means to eliminate uncertainty.
If you’re looking to qualify for the R&D tax credit, you need to evaluate what kinds of uncertainty your business faced over the past year – and how you worked to overcome them.
While this may seem contrary to what you’ve learned about running a business effectively, companies looking to qualify for the R&D tax credit should embrace uncertainty – provided they’re ready to work toward eliminating it. An activity that eliminates uncertainty is anything your business does to address, improve, or develop a product, a product’s design, or a process the company undertakes.
What kinds of uncertainty qualify?
Businesses deal with some level of uncertainty often, so pinpointing relevant uncertainties is paramount.
Here’s a good rule of thumb: If you can follow established guidelines or processes to eliminate the uncertainty in question, the activity probably doesn’t qualify. So, if you’re looking to keep better track of your social media content, or manage your digital assets more effectively, selecting a new cloud service or opening a new spreadsheet to solve your problem would not rise to the IRS’ definition.
As we learned from our first blog in the series, the uncertainty must be related to the products or services that you offer, not the marketing or advertising thereof. From there, eliminating uncertainty usually means your company encountered a problem with a high degree of technical uncertainty, and tried to solve it using some level of expertise. Routine fixes, maintenance, automation, software upgrades and fixes after major crashes all generally fall outside of the IRS’ guidelines. In some cases, however, efforts to improve or change these responses can qualify businesses for R&D tax credit.
Let’s look at the example of hatmaker Janessa Leone. When the company wanted to make their hats more environmentally sustainable, they experimented with different types of thread to see which ones maintained their hats’ quality while creating a lower carbon footprint. In this process, they discarded many hats that didn’t satisfy their criteria; they even experimented with different threads without finding one that met their goals. That was all okay – they still used their team’s expertise to tackle a technically uncertain problem and experimented to find the right result.
Finally, when evaluating whether your activity sufficiently eliminates uncertainty, make sure to keep things in perspective: You don’t have to eliminate an industry-wide uncertainty, just one for your business. A firm that specializes in cryptocurrency taxes doesn’t need to revolutionize tax software, they simply need to solve a problem to offer something new to customers or fine-tune how they deliver their services.
Who can help me determine if my company qualifies?
A general tax consultant, CPA or your company’s CFO may not have the specialized knowledge needed to qualify an R&D tax credit. At Ardius, we’re focused on this specific credit and know from broad experience what activities do or don’t qualify. Think of it like the difference between a general care physician and a neurologist. Our team has more than 100 years of combined experience spanning Deloitte, PWC, EY and KPMG. We can work with your company to quickly determine whether you qualify and maximize your credit.
Next up in the series, we’ll look at the permitted purpose aspect of the four-part test.
Think you may qualify for the R&D tax credit? Reach out to our team today.