R&D Credit Overview
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      How to Qualify for the R&D Credit: The Four-Part Test

      IRC §41(d) promulgates a “Four-Part Test” that governs the analysis as to whether or not an activity qualifies for the credit. The Four-Part Test is outlined below.

      1. New or Improved Business Component (Product, Process, Software, Invention, or Formula)
        1. Functionality
        2. Performance
        3. Reliability, or
        4. Quality
        5. NOT qualified if related solely to style, taste, cosmetic, or seasonal design factors
      2. Elimination of Uncertainty
        1. Related to the capability or methodology for developing or improving a product or process
      3. Process of Experimentation (to resolve uncertainty)
        1. Includes Trial and Error
        2. Prototyping
        3. Modeling and simulation efforts
      4. Technological in Nature (based in a hard science) – process of experimentation is reliant on the principles of: 
        1. Physical Sciences;
        2. Biological Sciences;
        3. Engineering; or
        4. Computer Science

      Simply put, when determining whether the business component meets the requirements of the 4-part test you are essentially determining whether the client is going through a process that emulates the scientific method; in laymen’s terms this equates to the following series of questions:

        1. Can we do it (capability)?
        2. How can we do it (methodology)?
        3. What does it look like (appropriate design)?.

      Additionally, IRC Sec. 41(d)(4) specifically states that the following activities will not qualify for the R&D credit:

        1.  Research after commercial production;
        2. Adaptation of existing business components to a particular customer’s requirement or need without significant modification;
        3. Duplication of an existing business component;
        4. Surveys or studies related to efficiency, management functions or techniques, market research, routine data collection, or routine quality control testing or inspections;
        5. Research conducted outside the U.S., Puerto Rico, or any possession of the U.S.;
        6. Research related to social sciences, arts, or humanities; and,
        7. Funded research (discussed in further detail here). NOTE: INSERT HYPERLINK