U.S. companies of all sizes, from small businesses and startups to large corporations, may be eligible for the R&D tax credit. With the goal of incentivizing innovation, the R&D tax credit is a dollar-for-dollar tax incentive that can be used to offset payroll or income taxes. A company does not need to be profitable in order to qualify. Instead, companies must meet four criteria outlined by the IRS in a four-part test.
In this deep-dive series, we’re taking a close look at each of the four parts to help companies understand if they qualify. First up is the technological in nature criteria. Even companies that don’t define themselves as tech companies can still qualify. We’ve secured R&D credits for beauty and fashion brands, marketing agencies, software providers, and others.
To be considered technological in nature, an activity must fundamentally rely on a hard science. But what does that mean, exactly? Let’s dig in.
What is a hard science?
Hard science is defined as any of the natural or physical sciences that use hypotheses and experiments. Activities like engineering, physical sciences or computer science count as hard sciences for R&D qualification. Soft sciences like psychology, sociology, or anthropology may use hypotheses and experiments, but do not qualify.
This doesn’t mean your company needs to employ white coats in a lab. Companies that use machine learning, physics, chemistry, biology, software, or electrical engineering may qualify. In order for software development to qualify, the activity must pass three additional tests:
- It must be innovative, resulting in significantly reduced cost or improved speed.
- It must involve economic risk and require the use of resources where the recovery of these resources is uncertain.
- It must not be commercially available.
What types of business activities fall into this category?
Many business leaders assume their R&D activity must involve a product in order to qualify, but that’s not always the case. Although marketing activities don’t often qualify, activities like processes and manufacturing can.
Let’s look at a hypothetical food brand. If that company is using technology to increase the shelf life of a product or make it more nutritious, that would qualify for the credit. If the company is past the typical R&D phase of product development, there may be parts of its manufacturing process that also qualify. For example, if the company is experimenting with new techniques to improve the manufacturing process itself, those activities could qualify. This could include changing equipment, or applying new technology to make the process more efficient or reliable.
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 for, earn and keep 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’re diving into the eliminate uncertainty aspect of the four-part test.
Think you may qualify for the R&D tax credit? Reach out to our team today.