While R&D tax credits are commonly associated with laboratory work, many industries can qualify for credits. However, certain industries may find it more challenging to qualify for R&D tax credits for several reasons, including difficulty proving an activity qualifies, meeting all the IRS four-part test criteria, and reporting activities properly.
Although it can be challenging to prove that your industry is performing qualifying research activities (QRAs) for several reasons, there are several strategies to help, including:
Difficulty Proving an Activity Qualifies
For some industries, proving their research and development is a (QRA) is straightforward. However, other sectors may find it more difficult to prove their activity is qualified research.
For example, an ecommerce company that chooses to redesign its website to make it more user-friendly to increase sales may have a hard time proving that the changes made are not purely aesthetic. However, the company can qualify for R&D tax credits if the redesign includes features that require testing and coding, such as integrating it with an inventory management system or implementing a live chat feature.
Meeting the Criteria for the IRS Four-Part Test
The IRS’ four-part test is a set of criteria companies must fulfill to qualify for R&D tax credits, including eliminating uncertainty, experimentation, technological development, and creating or improving a business component. Some organizations may have trouble proving their activities meet the criteria, particularly those outside the hard sciences.
Non-science industries can ensure they meet the criteria by writing their research and development claims from a technical perspective rather than a managerial one. Companies must prove they resolved a technical uncertainty and made a technological advance within the organization. For example, a food production company can automate parts of the production process and increase its chances of qualifying for R&D tax credits.
Reporting Activities Correctly
Companies filing for R&D tax credits must document their activities thoroughly to receive savings. In 2022, several changes to the submission requirements took effect, making the claims process more stringent to reduce the number of fraudulent claims.
Following the new requirements, organizations must report the names of individuals who performed research and development along with the activities. In addition, companies must comprehensively track qualified research expenses (QREs). Businesses can meet these new requirements by thoroughly documenting all R&D activities and qualifying expenses before submitting their claim to the IRS.
Although claiming R&D tax credits can be challenging, MainStreet helps organizations in several industries claim the credits they are eligible for. Contact us to start saving money today.