To qualify for R&D tax credits, a business can be working to develop new products, to improve or strengthen existing products, and/or to install, develop or upgrade manufacturing processes.

The IRS applies Four Tests to determine whether a research activity qualifies for an R&D tax credit. Along with meeting these tests, a company must also assume the financial risk associated with its R&D activities.

The Four Tests

1. R&D Must Be Technological
Research and development must fundamentally rely on the principles of the physical or biological sciences, engineering, or computer science.

2. For a Business Purpose
R&D work needs to have been carried out for a business purpose — to develop a new product or other component, or improve an existing one, in quality, reliability, performance, and/or functionality.

3. To Eliminate Uncertainty
The R&D work must have been directed toward eliminating uncertainty, by generating new information on developing or improving a product.

4. With a Process of Experimentation
The work must involve a process of experimentation — simulation, modeling, testing, and/or deliberate trial and error.

Examples of qualifying research:

Hands-on technical activities

Employees conducting research activities that qualify for R&D tax credits are generally doing hands-on work that aims to identify and resolve technical problems. Some examples include:

  • A design engineer developing new products.
  • A manufacturing engineer devising new process systems.
  • An electrical engineer developing new computer circuitry.
  • A process engineer improving the performance of fabrication systems.
  • A chemist formulating new chemical compounds.
  • An environmental engineer deriving methodologies for resolving ground contamination.
  • A civil engineer developing components for infrastructure systems.
  • An agricultural engineer evaluating soil samples.
  • A scientist performing laboratory experiments.
  • A computer programmer developing software code.
  • A mechanical engineer improving power systems.
  • An architectural engineer developing building fabrication systems.
  • A bio-engineer developing new bacteria for waste water systems.
  • A materials science engineer evaluating plastic polymers.
  • A process engineer improving cleaning systems.
  • A computer engineer designing cashless payment systems.

Direct supervision

Qualifying research commonly involves immediate supervision or first-line management, as in the case of an engineering manager who directly supervises a team of engineers and technicians, but who does not perform hand-on development work. Examples include:

  • Attending technical meetings in which specifications, concepts or results are discussed,
  • Meeting directly with engineers involved in resolving technical issues,
  • Defining technical challenges needing to be addressed,
  • Project planning,
  • Reviewing proposed design configurations or process methodologies,
  • Managing the development process,
  • Providing feedback to senior management regarding the ongoing research activities.

Supporting activities

Qualifying research often involves support that employees provide. For example:

  • A technician calibrating research equipment,
  • A machine operator fabricating a prototype component,
  • A system operator assisting engineers with process trials,
  • A shop foreman providing technical feedback to the research team,
  • A salesperson providing conceptual or technical information to the development team,
  • A clerk typing technical reports,
  • A maintenance worker cleaning up following an experimental process test,
  • A quality assurance worker performing analysis and compiling information relating to prototype products,
  • A purchasing agent investigating sources and procuring materials for use in a prototype product or new process system.