Identifying business components is a foundational step in R&D tax credit analysis. This page explains how to identify business components in a way that can help support a credit claim. It is educational and is not individualized advice. For the underlying framework, see our page on qualified research.
What Is a Business Component?
Under Section 41(d)(2)(B), a business component is any product, process, computer software, technique, formula, or invention that is intended for use in a trade or business. The research must be directed at developing or improving a specific business component, and the analysis is applied at the business-component level.
How to Identify Business Components
A useful approach to identifying business components is to ask what the research was directed at developing or improving:
- Product — a new or improved physical product.
- Process — a new or improved manufacturing or business process.
- Software — new or improved computer software.
- Technique — a new or improved technique or method.
- Formula — a new or improved formula or formulation.
- Invention — a new or improved invention.
Each business component should be identifiable and intended for use in a trade or business. General research without a connection to a specific business component may not qualify. For more, see our page on qualified research.
Common Identification Challenges
Common challenges in identifying business components include:
- Too broad — identifying a business component at too broad a level (e.g., "the company" rather than a specific product or process).
- Too narrow — identifying a business component at too narrow a level (e.g., a single test rather than the product or process being developed).
- No connection — identifying activities without connecting them to a specific business component.
The business component should be at a level that is specific enough to connect activities and costs, but broad enough to capture the development effort.
Hypothetical Example
Consider a manufacturer that is developing a new product and improving the manufacturing process for that product. The business components may include the new product (a product) and the new manufacturing process (a process). Activities and costs should be connected to the appropriate business component.
This example is illustrative only.
Key Takeaway
Identifying business components is a foundational step in R&D tax credit analysis. A business component may be a product, process, software, technique, formula, or invention, and the analysis is applied at the business-component level. Because the identification is fact-specific, professional review is appropriate.