Using the Four-Part Test to Qualify R&D

Many tax advisors use a framework call the Four-Part Test to identify and qualify projects undertaken by your company in a given tax year. As long as your project passes all four parts, the project is considered R&D and is worth digging deeper into the activities that make up the project. Note that the project does not have to be a success nor does it have to be completed by year end in order to qualify. In the previous blog, we touched briefly described the Four-Part Test. To recap, the qualified research activity must (1) be towards the development of a new or improved business component, (2) eliminate uncertainty, (3) undergo a process of experimentation, and (4) be technical in … Read More

How the IRS defines and treats small businesses conducting R&D

The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) was signed into law by Barack Obama on December 18th, 2015. This event marked a huge win for small businesses that perform R&D activities. Not only did the PATH Act make the R&D tax credit permanent, it also enhanced how small businesses can utilize their tax credits. There are two types of small businesses as defined by the IRS: Qualified Small Businesses and Eligible Small Businesses. A qualified small business (QSB) is an S or C corporation or partnership with (1) gross receipts* of less than $5 million for the taxable year and (2) did not have gross receipts in any tax year preceding the five-tax-year period that … Read More

What is the R&D Tax Credit?

The R&D tax credit is a general business tax credit under Internal Revenue Code (IRC) §41 for companies that incur research and development (R&D) costs in the United States. R&D clearly stands for research and development. However, the IRS’s definition of R&D may differ from what is usually considered R&D. According to IRC §41 (d), R&D has to pass a Four-Part Test. The qualified research activity must (1) be towards the development of a new or improved business component, (2) eliminate uncertainty, (3) undergo a process of experimentation, and (4) be technical in nature. We will dive deeper into the Four-Part Test in another blog. Ultimately, given the IRS’ broader definition of R&D, companies from a variety of industries qualify … Read More