R&D Tax Credit Studies: What is the Permitted Purpose test and why does it matter?

Many people hear about all the ‘work’ associated with completing a research and development (R&D) tax credit study, but the reality is that the savings associated with this credit make it more than worth it, which you can read about in a prior blog. Although, to receive all these benefits, your company must pass four qualifying tests.

Today we will be discussing the first of these tests, the permitted purpose test. The Internal Revenue Service (IRS) defines permitted purpose as, “any process that is new to the company or any process that has been improved.” This test is the most important component of the research and development tax credit because it determines if the work you do can be considered for the credit.

During an R&D study, a list of qualifying jobs will be compiled, and the validity of the processes will be accessed to best help you receive the most credit for your company. Most companies don’t even realize that the everyday functions of their jobs qualify for this credit and can pass the permitted purpose test.

If you have created or improved the function, reliability, quality, or performance of a business component, you may very well qualify to receive the credit. This includes any process, invention, formula, technique, product and computer software not intended solely for internal use of the creator.

One of the biggest things to think about when considering a research and development credit is there are some activities that will not meet these qualifications. These include, but are not limited to, new processes created after the start of commercial production of a product or process, any adaptation of a current product or process, the duplication of a product or process, and not for visual aesthetics.

If your organization has created something brand new or improved a process or product, you could reap the benefits of significant tax savings. Email us today to determine if you qualify.