Tax Day is coming soon, and you may be thinking about how to reduce your business’s operating costs. One way is to use research and development (R&D) tax credits to save on R&D costs. When a business makes an R&D tax credit claim, they must understand which activities are considered qualified research activities (QRAs) and those excluded.
Reviewing administrative and management functions
Reviewing and improving administrative and management functions such as budgeting and organizing do not qualify for an R&D tax credit claim. While these activities attempt to resolve an uncertainty within an organization and may require research, they are primarily non-technical tasks. They do not fit all the criteria of the IRS’ four-part test.
Research conducted outside of the United States
When filing for R&D tax credits in the U.S., companies must perform their research and development activities within the U.S. or any of its territories. The IRS does not consider R&D in another country a QRA.
Exclusively cosmetic changes
Cosmetic changes to a product’s color or appearance do not qualify for R&D tax credits. For example, a computer hardware company releasing a limited-edition PC color or a software company redesigning its interface to be more visually pleasing would not count as research and development. However, if achieving the cosmetic effect requires technological advances, that activity would qualify.
Troubleshooting equipment or processes
Routine troubleshooting to detect errors and faults in a product does not count as a QRA. Quality control checks do not involve technical uncertainty, as they verify that a product is working as intended rather than improving upon it.
Social science activities
Social science activities include market research, surveys, and data collection. These activities are non-technical in nature and do not meet the IRS’ technical requirement for R&D tax credits.
Duplicating previous projects
Undertaking projects identical to previously completed projects do not qualify for an R&D tax credit claim.
Any other activity that does not meet the four-part test criteria
If there is any doubt as to whether your company’s activity qualifies for R&D tax credits, check to see if it fulfills the IRS’ four-part test. Any activity that does not meet all the test criteria is not eligible to be part of an organization’s R&D tax credit claim.
It can be complicated for busy small business owners to distinguish between QRAs, and activities excluded from R&D claims. Let us help you claim all tax credits you are eligible for today!