Qualifying Research Activities relate to efforts undertaken to develop new products, enhance existing products, and to develop or improve manufacturing processes. In order to qualify for the R&D tax credit, the qualifying research activities must satisfy the Four Tests ascribed by the Internal Revenue Service. In addition, the company carrying out the work must bear the financial risk.

The Four Tests:

  1. Technological-in-Nature
  2. Permitted Purpose
  3. Uncertainty
  4. Process-of-Experimentation

The activity was undertaken for the purpose of discovering information that is technological in nature and fundamentally relies on principles of physical or biological sciences, engineering or computer science. The activity was intended to exceed, expand or refine the common knowledge of the skilled professionals in a particular field of science or engineering.

It has been found that there are three types of R&D situations in which qualifying research activities occur: Classic R&D  |  Contingent R&D  |  Unplanned R&D


Conduct R&D Activities

Employees who conduct research activities are generally involved in hands-on efforts and engaged in identifying and resolving technical problems.

Examples of employees conducting research activities are:

  • 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.

Direct R&D Supervision

Direct supervision of research activities concerns immediate supervision (first-line management) of qualified research activities, 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. Direct Supervision does not include supervision by a higher level manager of a first-line manager who directly supervises but does not conduct hands-on research activities.

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.

Support R&D Activities

Support of research activities refers to activities performed that support those employees conducting or supervising the qualified research activities.

Examples of such activities include:

  • 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.