Understanding the Four-Part Test: A Look Into Technical Uncertainty

Apr 16, 2019 9:00:00 AM

technical uncertainty

When identifying manufacturing activities that qualify for the R&D Tax Credit,  you may see many different levels of "technical uncertainty." It could be as simple as reducing the time and complexity of an assembly process.  Or, it could be as complicated as redesigning all the tooling components to utilize high-speed manufacturing techniques – or employing the use of robotics to reduce the cost of manufacturing the product. It doesn’t matter where your organization’s activities fall along that spectrum, as long as technical uncertainty is involved.

Technical uncertainty is one element of the Four-Part Test that activities must pass to qualify for the R&D Tax Credit. Fortunately, the manufacturing process often includes many activities that clearly exist to eliminate that kind of uncertainty.  

Discovery and learning during the manufacturing process

The manufacturing process is a time for discovery and learning. For example, a manufacturer may introduce a new approach to making a part for a customer. This new procedure or concept could incorporate an experimental idea that may combine many factors, including (but not limited to) requirements gathering, design meetings, engineering, proof of concept, financial investment, and risk for the organization.

As it relates to R&D, the goal of this process is to uncover information that will reduce or eliminate technical uncertainty as the new product or process is developed. Manufacturers understand that nearly all goals are attainable.  However, it’s more a question of how they will achieve the goal of manufacturing the part or improving the process in a way that is both time-efficient and cost-efficient, while still achieving the same level of quality and effectiveness. Sacrificing either of those aspects is not an option. Continuing to meet or exceed customer specifications and requirements is a critical part of the process.

Overcoming technical uncertainty

Overcoming technical uncertainty can happen at any time while attempting to develop or improve a product or process, which is why it’s important to understand all nine steps of the standard manufacturing process.

  1. Sales Time
  2. Design Meetings
  3. Flat Blank Layouts
  4. Tool Making
  5. Engineering Process
  6. Proof of Concept
  7. Trial Production Run
  8. Quality Approval
  9. Shipping

Technical uncertainty, however, is just one four requirements to qualify for the R&D Tax Credit.    

The Four-Part Test

Once you’ve identified potential qualifying activities, run them through the four-part test to verify. The four parts of the test are:

  • Permitted Purpose. This is the activity intended to make or improve either a product or process that results in improved function, performance, reliability, quality or cost efficiency.
  • Technical Uncertainty. This is the activity intended to eliminate technical uncertainty when developing or improving a product or process related to methodology, design, techniques, formulas or inventions.
  • Process of Experimentation. This is the activity that includes a process of experimentation to eliminate or resolve technical uncertainty. During the process, various alternatives and approaches are evaluated by modeling, simulation, trial and error, prototyping and other methods.
  • Technological in Nature. The process of experimentation must rely on the hard sciences (engineering, physics, biology, chemistry, computer science).

An R&D tax specialist can help you understand which of your activities help to eliminate technical uncertainty, as well as how to meet the other requirements of the Four-Part Test.

Plus, a beneficial part of working with an R&D tax specialist is that this person (or firm) will stand behind the work performed in the event of an audit.

Watch our 4-minute video on how we saved one client enough to buy a huge piece  of game-changing machinery with the R&D Tax Credit