Case Study for Water Treatment R&D
This case study shows the application of key legislative requirements for qualifying R&D activities as they apply to relevant activities in the water treatment industry.
Business Scenario
Wise Water Corporation specializes in the custom chemical synthesis of a unique range of proprietary, environmentally compatible and non-toxic water treatment products. All formulations are custom manufactured in the United States using locally sourced US raw materials.
In 2012 and onwards, Wise Water began projects with the main objective to engineer and develop reliable products and innovative solutions for water treatment. Water Wise constantly conducted R&D to create new and improved products to perform to the best of its ability.
In order to qualify for the Research and Development Tax Credit, Wise Water needed to determine the eligibility of its proposed R&D activities. The “qualified research” must meet four main criteria, known and developed by Congress as the Four-Part Test. Water Wise’s qualified R&D activities included the following.
Wise Water’s Eligible R&D Activities
Background research to evaluate current knowledge gaps and determine feasibility (background research of the development of Water Wise’s products).
Prior to 2012 Water Wise had no experience in high pressure boiler products. Previously, their work had focused on low pressure installations. Water Wise was approached by a research institute to begin a tailored collaboration in 2012 to develop and trial a treatment metal passivation solution for the many problems plaguing the high-pressure thermal power industry.
Besides the lack of comparable solutions available, the outcomes of activities in this research could not have been known or determined in advance due to a number of specific technical challenges. For instance, a stall in development of conventional cycle chemistry, limitations such as inadequate metal protection, chemistry-related utility failures, downtime, forced outages and high-maintenance costs were involved.
Up to that time, there was no known method to measure Anodamine concentration, especially at such extreme conditions as seen in the high-pressure industry.
Design and development of a series of prototypes to achieve the technical objectives (development and testing of the system’s real-time assessment capabilities).
Water Wise’s hypothesis for the development stage was if the product could be developed to offer metal protection with environmentally-friendly, green technology.
Apart from the multiple analytical methods employed to validate a products performance, methods of directly monitoring and quantifying the residual of the chemical technology remain of paramount importance for acceptance and successful implementation. Thus, Water Wise was required to develop a simple, reliable, reproducible and site functional spectrophotometric method to monitor the concentration of Anodamine HPFG and validate success.
Moreover, Water Wise specializes in utilizing custom manufactured formulations using locally sourced US raw materials. It is almost impossible to find reasonably-priced, US manufactured water treatment options. Water Wise wanted to fill that gap and created several innovative products designed to fill that need.
Trials and analysis of data to achieve results that can be reproduced to a satisfactory standard and to test the hypothesis (development of an additional trial feature).
Water Wise undertook continuous improvements through research in development in the following areas:
- Improvements to production time and manufacturing efficiency
- Improvements in quality of products
- Increased metal protection
- Improvement in safety
- Reduced environmental impact
- Decrease in labour and production costs
- Production innovation sourced from:
- Internal ideas
- Existing customers who have business needs which require new solutions
Water Wise eliminated uncertainty by:
- Testing across all supported releases to determine reliability and user-friendliness
- Experimentation with possible fixes until an adequate solution was determined
Ongoing analysis of customer or user feedback to improve the prototype design (feedback of Water Wise).
Feedback of the product developed was necessary to evaluate the performance capabilities of the new design in the field and improve any flaws in the design. To ensure plant protection, reliability and availability of the product, Water Wise’s technologies perform frequent site consultancy services ensure program.
Since the initial development of Anodamine HPFG, the product has constantly been refined and improved, due to economic pressure and to meet additional thermal power industry concerns and changes such as increased transient, peaking, and frequent-shutdown schedules. The compliance and regulatory demands and standards of operation in the high-pressure industry are far more stringent than that of the low-pressure industry.
Moreover, Water Wise’s R&D program involved hours of on-site monitoring program application and performance and developing new strategies and validation tools to verify plant protection.
Commentary
Qualified Research Defined
Qualified research consists of research for the intent of developing new or improved business components. A business component is defined as any product, process, technique, invention, formula, or computer software that the taxpayer intends to hold for sale, lease, license, or actual use in the taxpayer’s trade or business.
The Four-Part Test
Activities that are eligible for the R&D Credit are described in the “Four-Part Test” which must be met for the activity to qualify as R&D.
- Permitted Purpose: The purpose of the activity or project must be to create new (or improve existing) functionality, performance, reliability, or quality of a business component.
- Elimination of Uncertainty: The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of the business component. Uncertainty exists if the information available to the taxpayer does not establish the capability of development or improvement, method of development or improvement, or the appropriateness of the business component’s design.
- Process of Experimentation: The taxpayer must undergo a systematic process designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result, or the appropriate design of that result, is uncertain at the beginning of the taxpayer’s research activities.
- Technological in Nature: The process of experimentation used to discover information must fundamentally rely on principles of hard science such as physical or biological sciences, chemistry, engineering or computer science.
What records and specific documentation did Water Wise keep?
Similar to any tax credit or deduction, Water Wise had to save business records that outlined what it did in its R&D activities, including experimental activities and documents to prove that the work took place in a systematic manner. Water Wise saved the following documentation:
- Project records/ lab notes
- Conceptual sketches
- Design drawings
- Literature review
- Background research
- Design documents for system architecture and source code
- Testing protocols
- Results of records of analysis from testing/trial runs
- Records of resource allocation/usage logs
- Staff time sheets
- Tax invoices
- Patent application number
By having these records on file, Wise Water confirmed that it was “compliance ready” — meaning if it was audited by the IRS, it could present documentation to show the progression of its R&D work, ultimately proving its R&D eligibility.
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