Do You Qualify for the R&D Tax Credit?
FOUR-PART R&D TAX CREDIT CRITERIA
The R&D tax credit isn’t limited to laboratories and tech companies. Businesses in many industries may be eligible if their activities meet the IRS’s four-part test. Manufacturers, software developers, apparel brands, wineries, and life sciences companies often qualify without realizing it.
1. Permitted Purpose
The activity must relate to a new or improved product, process, formulation, invention, software, or technique that increases performance, function, reliability, or quality.
2. Technological in Nature
The activity must fundamentally rely on the hard sciences, such as engineering, physics, chemistry, biology, or computer science.
3. Technical Uncertainty
At the outset of the project, there must be uncertainty about the capability to develop, the method of developing, or the appropriate design of the new or improved product or process.
4. Process of Experimentation
Substantially all of the activities must be undertaken to eliminate or resolve that uncertainty. This involves evaluating one or more alternatives through modeling, simulation, systematic trial and error, or other methods.
Which R&D Expenses Qualify?
Costs related to R&D activities may be eligible to be expensed immediately to reduce overall tax liability. Qualified R&D costs can potentially include these four categories.
1. Wages
Wages qualify when employees perform, supervise, or support qualified research. That includes conducting or executing the research, supervising those who do, and providing direct support.
2. Supplies
Tangible property used directly in research activities may qualify if it wasn’t capitalized or depreciated. A common example is raw materials used to build and test prototypes.
3. Contract Research
Amounts paid to a third party to perform qualified research on your behalf may qualify. To claim these costs, your business must:
- Maintain substantial rights to the research performed; and
- Bear the economic risk of the contractor’s development.
4. Computer Rental/Lease Costs
Costs to purchase and maintain technology used in research may qualify. Payments to cloud service providers may also qualify when they relate to hosting new or improved software.
Our promise to you
Cost-free assessments
Your day-to-day tasks may qualify for significant R&D tax credits. Our team is happy to review your organization to assess eligibility.
Access what you deserve
If you haven’t been taking R&D tax credits, it’s not too late. We’ll review past returns and identify any missed opportunities.
Your benefit is our only goal
Our flat-fee, no contingency approach is focused on getting you defensible credits with limited risk.
Section 174: What It Means for Your R&D Credit
Recent tax law changes affect how R&D costs are deducted, and they interact with the credit. Domestic research is now governed by Section 174A, while Section 174 continues to apply to foreign research.
- Domestic research: For tax years beginning after 2024, businesses can generally deduct domestic research costs immediately under Section 174A.
- Foreign research: Costs for research performed outside the U.S. must still be amortized over 15 years.
- Prior years: Businesses that capitalized domestic research costs in 2022 through 2024 may be able to recover the remaining amounts sooner, and some smaller businesses may be able to amend prior-year returns.
Whatever your situation, your credit claim and your deduction treatment need to line up. Inconsistent positions between Section 41 and Section 174 treatments can draw IRS scrutiny. MGO helps you evaluate both together so your credit strategy, cash flow, and compliance support each other.
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Tax Partner
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