Meeting the uncertainty requirement can be challenging for small businesses because it can be confusing to document. When claiming R&D tax credits, companies must prove that their R&D activity attempts to resolve a technical uncertainty. The uncertainty requirement is part of the IRS’ four-part test, a set of standards a company’s R&D activity must meet to qualify for R&D tax credits.
Defining Technical Uncertainty
Technical uncertainty is when the probability of achieving a particular goal or result or how to achieve it is not known at the outset of research and development. Regardless of industry, there will be uncertainty when trying to develop a new business component or improve an existing one. This requires businesses to ask themselves two questions:
- Can we achieve the desired result?
- How do we accomplish our goal?
How to Document Uncertainty
It is crucial to document uncertainty when applying for R&D tax credits. The IRS has recently become more stringent with its R&D tax credit requirements, emphasizing the importance of proper documentation.
Process outline
The R&D process typically includes brainstorming ideas, narrowing down the ideas to pursue further, developing, testing prototypes, and applying the business component. Get the whole process into writing to ensure your activities meet the requirements.
Technical Documents
Before claiming R&D tax credits, gather all technical documents related to uncertainty, such as blueprints, technical issue reports, designs, meeting notes, and project descriptions.
Timeline
Keeping track of the project’s timeline is another essential aspect of tracking R&D activity. It provides additional information that the IRS can use to verify claims.
Prototypes
Prototypes verify that there was uncertainty at the start of a project. Track each prototype’s details, including specifications, trials, and results.
R&D participant job titles
Another important aspect of documenting uncertainty is to report the job titles of everyone involved in the project. Job titles involving research, such as engineers, designers, and scientists, increase a business’s likelihood of qualifying for R&D tax credits.
A common misconception is that R&D activities must be successful in qualifying for R&D tax credits. No matter the result, R&D activity can be eligible if it meets the uncertainty requirement.
The uncertainty requirement for R&D tax credits can be difficult to articulate. At MainStreet, we aim to help your company meet the uncertainty requirement and simplify the process of claiming tax credits so you can invest more time into your business. To start increasing your tax savings, contact us today.
