How does the IRS define R&D and how to apply that description to your business.
Simply put, research and development activities must meet 4 criteria:
- The activities must be intended to be useful in the development of a new or improved business component in terms of improving quality, performance, reliability, or new functionality.
- The activities must involve the elimination of technical uncertainty concerning the development or improvement of a product or process.
- Substantially all the activities must be experimental in nature and conducted for a permitted purpose of the business components identified in number 1.
- The activities must be intended to discover information that is technological in nature, relying on principles of the physical or biological sciences, engineering, or computer science. Though social sciences such as psychology are important, they are not included in R&D.
Software developers may easily be able to identify which part of their time is dedicated to the development of new products or systems (allowing for some administrative time, etc). But what about non-technical or customer-facing roles? Would they be disqualified? Not necessarily. Say you have a team developing social media content. Writing the content or researching products would not necessarily qualify as R&D. However, if they worked directly with customers to obtain feedback that was then used to create a novel service aspect of the product that is related to R&D, well, that could count.
Individuals that are testing new features and providing feedback on improvements can qualify regardless really of the normal functional area of the person doing the activity. As long as there is technical uncertainty regarding the overall effort and that testing is an attempt to eliminate said technical uncertainty, their individual contributions could count.
If you have any questions, please feel free to reach out!