The R&D Tax Credit 4-Part Test

The R&D tax credit offers businesses a valuable opportunity to reduce their tax liability. Qualifying requires meeting the IRS 4-part test, which helps identify eligible activities and maximize savings.

The 4-Part Test Criteria

1). Permitted Purpose

To qualify, your research activities must be tied to a specific “business component.” Think of a business component as any product, process, technique, formula, or software your company develops or improves.
-Example: Developing a new software feature to improve processing speed.

2). Elimination of Uncertainty

This criterion requires that your research aims to eliminate technical uncertainty. In simpler terms, you need to be solving a puzzle where you don’t know the answer at the start—but you’re confident it can be solved through structured work.
-Example: Testing materials to identify the most durable solution for a new product.

3). Process of Experimentation

Finally, your activities must involve a process of experimentation. Think of this as testing different ideas to see what works best—a systematic approach to trial and error, rather than relying on guesses.
-Example: Prototyping a medical device and adjusting its design based on performance testing.

4). Technological in Nature

Your work must be grounded in principles of hard sciences, such as engineering, physics, biology, or computer science. Think of this as the “science part” of your work—it’s not about brainstorming but applying proven scientific methods.
-Example: Using algorithms to improve machine learning model efficiency.

What’s Next?

Reviewing what expenses can qualify for the credit! You can read more about it in our blog post on Qualified Research Expenses (QREs): Breaking Down the Basics

Conclusion

The 4-Part Test ensures that the R&D Tax Credit is targeted to activities driving genuine innovation and improvement. Meeting these criteria doesn’t mean your project must succeed—even failed attempts can qualify if the effort aligns with these principles.

Applying the 4-part test is essential for claiming the R&D tax credit. At Credits Granted, we help businesses identify qualifying activities and maximize their claims.

Contact us today to learn more