What qualifies as research and experimentation according to IRC Section 41?
- Activities that eliminate technical uncertainty qualify as research and experimentation. This implies that the information available does not establish capability, methodology, or appropriate product design.
- Qualified activities must be technological in nature. It may rely on computer science, physical science, biological science, and/or engineering. It may not rely on economics or business science.
- All activities must be based on a process of experimentation (trial and error, success or failure, hypothesis, and consideration of alternatives).
- Research and experimentation tests must attempt to improve performance, reliability, or quality, or significantly reduce costs.
What does not qualify as research and experimentation?
- Adaptation, duplication, or reverse engineering of existing business components
- Research after the point of commercial production
- Research conducted outside the United States
- Research conducted in social sciences, arts, or humanities
- Routine data collection, routine or ordinary testing, or quality control inspection
- Market research, efficiency surveys, or activities related to management function or technique, and advertising or promotions
- The acquisition of another party’s patent, model, production, or process
- Research in connection with literary, historical, or similar projects
- Research funded by grants, contracts, or another person or agency
What research is allowable under IRC Section 174?
- Research that is directly connected to the development or improvement of a product is allowable.
- Experimental or laboratory activities intended to discover information that would eliminate uncertainty in the development or improvement of a product are allowable. This includes research for any pilot model, process, formula, invention, technique, or patent.
- Hands-on research and the support and direct supervision of research activities are allowable.
The definition of allowable research expenses has been significantly broadened. The new rules do not “… require the taxpayer be seeking to obtain information that exceeds, expands, or refines the common knowledge of skilled professionals in the particular field of science or engineering in which the taxpayer is performing the research.”
Research and experimentation (R&D) tax credit services
We have helped businesses in many different industries, including agriculture, manufacturing, and high tech companies identify and document their qualifying research activities to help optimize their credit potential. Identification of qualifying research activities is not a tax or accounting exercise. It requires an in-depth understanding of agricultural operations and the involvement of scientists and operations personnel.
CLA’s tax professionals can help determine if your organization qualifies for a research and experimentation tax credit.