This article continues last week’s post with more examples of SRED (and non-SRED) work. These examples are summarized from the excellent government article on this topic, Eligibility of Work for SR&ED Investment Tax Credits Policy.
Cost targets lead to technological uncertainty
Cost targets, by themselves, are considered to be a business or sales related objective so they are not SRED. However, a cost target may lead to a technological uncertainty regarding how to achieve it. Resolving this uncertainty is SR&ED. This principle applies even when there is a known, more expensive, process able to meet the objective.
Here’s an example.
You want to develop a module for an energy efficient home which converts carbon monoxide to harmless carbon dioxide at ambient temperatures. There is an existing proven process to achieve this using a tin oxide and platinum process. The cost of the proven module is so high that it is price prohibitive to be used in a mass market, residential application such as yours. There are other proven methods to convert CO to CO2 but all require elevated temperatures (ie external heaters) to function properly. This constraint rules out their use in your intended application.
It is technologically unknown how to develop an inexpensive module that will convert carbon monoxide to carbon dioxide at room temperature. Thus your investigation to achieve this goal will be SR&ED eligible.
System uncertainty leads to technological uncertainty
System uncertainty occurs when a number of well known components are integrated into a system. There may be unpredictable interactions between the subsystems. It may be difficult to predict how the integrated system will perform due to unforeseeable adverse interactions. It will likely be necessary to change some of the underlying subsystems in order to achieve a stable, working overall system.
Attempting to resolve these unpredictable interactions and produce a working overall system can lead to technological advances, thus the work performed will likely be SRED eligible.
Determining the extent of claimable SR&ED work
Sometimes it can be difficult to break out SRED work from routine work performed. This problem comes up a lot in shop floor SRED, where your experimental SRED work can occur mixed in to normal production activities. The principle of claiming SRED work is that it is commensurate with the needs of, and directly in support of, the experimental work. Here’s an example.
You make field hockey sticks. You want to integrate a new production process using advanced laser measuring to improve accuracy in a key step to size lumber down to the rough stick size and shape. The new process will replace two pieces of machinery with a single workstation. You calculate that a test run of 500 sticks using the new process will be sufficient to perform a statistical analysis to determine whether the new setup can meet or exceed the accuracy of your current manufacturing process.
The week of the scheduled testing, you end up producing 2000 stick blanks using the new process to make up for a production shortfall due to a maintenance window in your conventional production process. For SRED purposes, you only consider the costs associated with producing the first 500 sticks using the new, integrated production process.
Check out more examples of SRED work in last week’s blog post, Examples of SRED work.
Do you want more information on SRED qualifying work? Check out this article!