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Research & Experimentation Tax Credit Services

The Research & Experimentation (R&E) Tax Credit is capable of producing significant tax savings for the research, development and improvement initiatives a company is already undertaking.

Simply defined, the R&E Tax Credit is a federal incentive that rewards taxpayers for the development and/or improvement of a product, process, formula, invention, technique, or software.

The credit has been in existence since the early 1980s and was created to incentivize companies to invest in technologies that facilitate increased product and process development, leading to growth in productivity, profitability and job creation.

In addition to the federal credit, around 30 states have a state credit as well.

Although originally intended for companies within industries that fit the more traditional definition of research such as pharmaceutical and defense, recent changes in the regulations have opened up the credit to companies in a wider variety of manufacturing, engineering and professional services fields.

The credit may be claimed for the current tax year, as well as retroactively for all open tax years.

Therefore, for taxpayers that have not previously taken advantage of the credit, the analysis typically involves a one to four year engagement, or even longer.

The R&E Tax Credit is utilized in a wide variety of industries. Examples in the manufacturing space include:

  • Automotive
  • Food & beverage
  • Energy
  • Chemical
  • Biotechnology and agricultural
  • Plastics
  • Metals
  • Life sciences
  • Tool & die and machine building
  • Computer hardware and software
  • Electronics
  • Medical devices
  • Pharmaceutical
  • Transportation

The R&E Tax Credit is also utilized in the contracting and professional services fields including:

  • Electrical and mechanical contractors
  • Construction and architectural firms
  • Engineering companies in the civil, environmental and structural fields

RubinBrown’s Research & Experimentation Tax Credit Service Group specializes in helping companies take advantage of R&E Tax Credits and developing the processes to continue doing so in the future.

In order for an activity to be qualified for the Research & Experimentation (R&E) Tax Credit under Internal Revenue Code (IRC) Section (§) 41, the activity must pass all the elements of what is commonly referred to as the ‘four part test.’ The four part test consists of the following:

  • IRC Section 174 Test: The expenditures incurred may be treated as an expense under IRC § 174. In order to be deductible under IRC §174, the expenditures must be incurred in connection with the taxpayer’s trade or business which are for activities intended to discover information that would eliminate uncertainty concerning the development or the improvement of a product. Uncertainty exists if the information available to the taxpayer does not establish the capability or method for developing or improving the product or the appropriate design of the product. The ultimate success, failure, sale, or use of the product is not relevant. Expenditures for land or exploration expenditures do not qualify. In addition, IRC § 174 limits expenditures to amounts that are reasonable under the circumstances.

  • Discovering Technological Information Test: Research must be undertaken for the purpose of discovering information, which is technological in nature. Information is technological in nature if it fundamentally relies on principles of the physical or biological sciences, engineering, or computer science. A taxpayer may employ existing technologies and existing principles of these sciences to satisfy this requirement.
    • This does not require the taxpayer to 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 research.
    • This does not require that the taxpayer succeed in developing a new or improved business component
    • Patent safe harbor. The issuance of a patent, other than a design patent, is conclusive evidence that the research satisfies the technological information test.
    • A patent is not a precondition for taking the credit.

  • Business Component Test: The research must relate to the development of a new or improved business component. A business component is any product, process, computer software, technique, formula or invention which is either held for sale, lease or license or used in the taxpayer’s trade or business.

  • Process of Experimentation Test: Substantially all of the activities of the research must constitute elements of a process of experimentation for a qualified purpose. A process of experimentation:
    • Is performed for a qualified purpose if it relates to a new or improved function, performance, reliability or quality of the business component. Qualified research does not include activities relating to style, taste (personal preference), cosmetic or seasonal design factors.
    • Identifies
      • The technical uncertainty concerning the development of improvement of a business component,
      • One or more alternatives intended to eliminate that uncertainty,
      • And the conduct of a process of evaluating the alternatives (through, for example, modeling, simulation, or systematic trial and error methodology.)

  • Research after commercial production
  • Adaptation of existing business components
  • Duplication of existing business components (reverse engineering)
  • Surveys, studies, etc. Any
    • Efficiency survey
    • Activity relating to management function or technique
    • Market research, testing, or development (including advertising or promotions),
    • Routine data collection, or
    • Routine or ordinary testing or inspection for quality control
  • Foreign research – Research performed outside of the United States, Puerto Rico, and other possessions of the United States
  • Social sciences, etc. Any research in the social sciences, arts, or humanities
  • Funded research
    • Research is not qualified to the extent research is funded by any grant, contract or otherwise by another person. Amounts payable under any agreement that are contingent on the success of the research and thus considered to be paid for the product or result of the research are not treated as funded.
    • Research is not qualified if the taxpayer performing the research for another person retains no substantial rights to research