Four-Part Test

The Four-Part Test serves as the primary regulatory threshold for determining the eligibility of research activities for the Oregon semiconductor tax credit. It requires that projects be technological in nature, aim to eliminate technical uncertainty, follow a systematic process of experimentation, and pursue a permitted purpose of improvement. This standardized methodology, derived from federal internal revenue standards, acts as a definitive sieve to ensure that state fiscal incentives are directed exclusively toward genuine technological innovation rather than routine industrial activities. By anchoring state eligibility to the established rigor of the Internal Revenue Code, Oregon provides a predictable yet demanding environment for semiconductor firms seeking to offset the high costs of innovation through corporate excise or personal income tax credits.

Legislative Evolution and the Modern Oregon Research Incentive

The landscape of research and development incentives in Oregon has undergone a transformative shift, moving from a broad-based incentive for all industries to a highly specialized industrial policy focused on the semiconductor sector. From 1989 until 2017, the state maintained a general research credit under Oregon Revised Statutes (ORS) 317.152 and 317.154, which allowed a wide range of corporate taxpayers to claim a five percent credit for increases in qualified research expenses. This general credit served as a cornerstone of the state’s economic development strategy for nearly three decades before sunsetting for tax years beginning after December 31, 2017. The expiration of this credit left a significant void in the state’s incentive portfolio, particularly as neighboring jurisdictions and international competitors intensified their efforts to attract high-technology manufacturing.

Recognizing the strategic importance of the “Silicon Forest”—Oregon’s hub for semiconductor design and manufacturing—the Legislative Assembly enacted House Bill 2009 in 2023. This legislation, effective for tax years beginning on or after January 1, 2024, established the Research and Development Tax Credit for Semiconductors, codified at ORS 315.518 to 315.522. This modern credit is not merely a restoration of the old program but a sophisticated, targeted instrument designed to bolster the state’s global competitiveness in the chip industry. It offers a significantly higher credit rate—15 percent of qualified research expenses exceeding a base amount—compared to the five percent offered under the defunct general credit.

Despite the transition to an industry-specific credit, the underlying legal definition of what constitutes “qualified research” remains inextricably linked to federal law. ORS 315.518(2) specifies that the credit shall be determined in accordance with Section 41 of the Internal Revenue Code (IRC), with specific modifications for the state context. This linkage mandates that every project seeking the Oregon credit must pass the same Four-Part Test used by the Internal Revenue Service (IRS). This continuity ensures that taxpayers can leverage their federal R&D tax credit documentation to support their state-level claims, provided they can isolate the expenses incurred specifically within Oregon.

Regulatory Milestone	Statutory Reference	Effective Dates	Core Function
General R&D Credit	ORS 317.152	1989 – 2017	Broad corporate research incentive at 5% rate.
Semiconductor Credit	ORS 315.518	2024 – 2029	Targeted incentive for chip design/fab at 15% rate.
Federal Conformity	IRC § 41	Ongoing	Standardizes “qualified research” via Four-Part Test.
Application Rule	OAR 150-315-0195	2024	Establishes DOR filing and ASC election procedures.

Detailed Analysis of the Four-Part Test Pillars

The Four-Part Test is a cumulative requirement; a taxpayer must satisfy all four criteria for each “business component” they develop or improve. A business component, under the law, is any product, process, computer software, technique, formula, or invention that is held for sale, lease, or license, or used by the taxpayer in its trade or business.

Pillar I: The Permitted Purpose Requirement

The first pillar, often referred to as the Business Component Test or the Qualified Purpose Test, establishes the technical objective of the research. To satisfy this requirement, the research must be intended to discover information that would be useful in the development of a new or improved business component. Specifically, the research must relate to a new or improved function, performance, reliability, or quality of the component.

In the semiconductor industry, permitted purposes are typically robust and technically demanding. They might include increasing the clock speed of a processor, reducing the thermal footprint of a power management chip, or improving the yield of a new fabrication process. The law excludes activities that are primarily focused on aesthetic, seasonal, or cosmetic aspects of a product. For instance, redesigning the packaging of a microchip for better shelf appeal would not qualify, whereas redesigning the physical packaging (the “chip scale package”) to improve heat dissipation or pin density would meet the permitted purpose requirement because it enhances the functional performance and reliability of the device.

Pillar II: The Elimination of Uncertainty

The second pillar requires that the taxpayer intend to discover information that would eliminate technical uncertainty concerning the development or improvement of a business component. Uncertainty exists if the information available to the taxpayer at the project’s inception does not establish the capability of developing the component, the method of achieving the result, or the appropriate design of the component.

It is vital to distinguish between technical uncertainty and business or economic uncertainty. A company may be uncertain whether a new chip will be profitable or if it will be well-received by the market; however, these are business risks, not technical uncertainties. To qualify for the credit, the company must face questions like: “Is it physically possible to fit this many transistors on this die size given current lithography limits?” (Capability); “What specific chemical vapor deposition sequence will achieve the necessary layer purity?” (Method); or “What is the optimal routing of interconnects to minimize signal cross-talk at these frequencies?” (Design). In the high-stakes world of semiconductor fabrication, where feature sizes are measured in nanometers, technical uncertainty is almost always present at the start of a design cycle.

Pillar III: The Process of Experimentation

The third pillar is arguably the most scrutinized during audits. It mandates that substantially all of the research activities must constitute elements of a process of experimentation. This requires a systematic trial-and-error approach where the taxpayer evaluates one or more alternatives to achieve the desired result. The process typically involves:

1. Defining the technical objective based on the identified uncertainty.
2. Identifying one or more alternatives for achieving that objective.
3. Conducting modeling, simulation, or physical prototyping to test those alternatives.
4. Analyzing the results to refine the design or choose a path forward.

The Oregon Department of Revenue looks for evidence of a scientific methodology. This means that if a company simply follows a “cookbook” or a set of well-established industry procedures to reach a known result, they are not engaged in a process of experimentation. They must be venturing into territory where the outcome is not predetermined. In semiconductor design, this often involves “tape-out” simulations, hardware-in-the-loop testing, and iterative “stepping” of the fabrication process to solve yield or performance issues discovered during initial runs.

Pillar IV: The Technological in Nature Requirement

The final pillar requires that the research fundamentally rely on principles of the “hard sciences”. This includes physical sciences (such as physics and chemistry), biological sciences, engineering, or computer science. Research based on the soft sciences—such as economics, management, or social sciences—is explicitly excluded from the credit.

For Oregon’s semiconductor sector, this requirement is usually straightforward. The industry is inherently built upon electrical engineering, materials science, and physics. However, it is important to note that the taxpayer is not required to advance the frontiers of science; they simply must use established scientific principles to solve their specific technical uncertainty. For example, a software engineer using computer science principles (such as algorithm complexity analysis) to optimize an Electronic Design Automation (EDA) tool meets this test, even if they are not inventing a new field of mathematics.

Application of Local State Revenue Guidance and Administrative Rules

The Oregon Department of Revenue (DOR) and the Oregon Business Development Department (Business Oregon) provide specific administrative frameworks that govern how the Four-Part Test and the broader R&D tax law are applied within the state. Understanding this local guidance is critical, as state rules often deviate from federal procedures in terms of certification, sourcing, and calculation methods.

Administrative Rule OAR 150-315-0195

This rule serves as the primary guidance for the semiconductor R&D credit. It clarifies that the credit applies to tax years beginning on or after January 1, 2024, and provides a bridge between state law and federal regulations. One of the most important provisions of this rule is the ability to elect the Alternative Simplified Credit (ASC) method. Under OAR 150-315-0195, a taxpayer can choose to calculate their credit using the percentages specified in IRC § 41(c)(4), provided they make the election on their Oregon tax return. This election is generally irrevocable for that tax year without prior approval from the DOR.

The rule also specifies that “qualified research expenses” for Oregon purposes mean the sum of in-house research expenses and contract research expenses for research conducted specifically within Oregon. This is a critical distinction; while a company may have a national R&D budget, only the wages paid to Oregon-based employees, the supplies consumed in Oregon facilities, and the payments to contractors for work performed in Oregon can be included in the state calculation.

Business Oregon Certification Manual and Procedures

Unlike the federal R&D credit, which a taxpayer claims simply by filing Form 6765 with their return, the Oregon semiconductor credit is a “certified” credit. Business Oregon is tasked with verifying the eligibility of the taxpayer and their activities before the credit can be claimed.

The certification process is an annual requirement, with a rigid deadline of October 15. To obtain certification, a company must submit an application that includes:

• An attestation and detailed narrative demonstrating that they meet the statutory definition of a “qualified semiconductor company”.
• A description of the proposed research activities and how they support the semiconductor trade.
• Projections of qualified research expenses and basic research payments for the tax year.
• A report of historical research expenses from the three preceding years to establish a baseline.
• A non-refundable application fee, which was $3,000 for the 2025 calendar year.

Business Oregon reviews these applications to ensure that the activities described meet the Four-Part Test and the specific industry requirements of ORS 315.518. If the department determines the taxpayer is eligible, it issues a certification letter specifying the maximum amount of credit the taxpayer can claim for that year. Because the state has a biennial cap on the total amount of credits that can be issued—$80 million for the 2025-2027 biennium—the certification process also serves as a mechanism to manage this cap. If the credit is oversubscribed, Business Oregon may prorate certifications for larger claims to stay within the statewide limit.

The Role of Sourcing and the Sales Factor

For the purpose of the Oregon R&D credit calculation, the “gross receipts” component used in the federal base amount formula is replaced by the Oregon sales factor as determined under ORS 314.665. This modification ensures that the incentive is calibrated to the taxpayer’s economic footprint within the state.

Local guidance in OAR 150-317-1040 provides the rules for sourcing sales of services and intangible property (such as chip design licenses) to Oregon. Oregon uses a “market-based” sourcing approach, meaning receipts are assigned to Oregon if the taxpayer’s market for the service or property is in Oregon. For a semiconductor company, this typically means that if the benefit of their research—embodied in a chip design or a fabrication service—is delivered to a customer in Oregon, those receipts are included in the Oregon numerator of the sales factor. This complex interplay between the Four-Part Test and sourcing rules requires that firms have robust accounting systems to track both the location of their research activities and the destination of their sales.

Financial Mechanics: Rate, Cap, and Refundability Tiers

The Oregon semiconductor credit provides a 15 percent credit on the excess of current-year Oregon QREs over a base amount. The maximum credit any single taxpayer can claim in a single year is $4 million. To prevent larger firms from exhausting the entire statewide allocation, the credit also includes a tiered refundability system that favors small and mid-sized enterprises.

Refundability is determined by the taxpayer’s Oregon employee count at the close of the tax year. This policy choice reflects the legislature’s intent to provide immediate cash flow to startups and growing firms that may not yet have a significant tax liability to offset.

Oregon Employee Count	Refundable Portion of Credit	Non-Refundable Portion	Carryforward Period
Fewer than 150	75%	25%	5 Years
150 to 499	50%	50%	5 Years
500 to 2,999	25%	75%	5 Years
3,000 or more	0%	100%	5 Years

The refundable portion of the credit may be used to satisfy the Oregon corporate minimum tax under ORS 317.090, providing a significant benefit even to firms in a loss position. Conversely, the non-refundable portion cannot be applied against the minimum tax and must be carried forward to future years when the company has a regular tax liability.

Example of Application: InnovateSemis LLC

To illustrate the practical application of the Four-Part Test and Oregon revenue guidance, consider InnovateSemis LLC, a fictional mid-sized semiconductor design firm based in Hillsboro, Oregon. In the 2025 tax year, the company has 140 Oregon employees and is focused on developing a new “Integrated Silicon Photonics” transceiver that integrates optical components directly onto a CMOS chip to dramatically increase data transfer speeds for data centers.

The Technical Narrative and the Four-Part Test

InnovateSemis must document its project according to the four pillars to support its eventual claim:

1. Permitted Purpose: The project aims to improve the “performance” (higher data rates) and “functionality” (integrating optics and electronics) of a transceiver chip.
2. Elimination of Uncertainty: At the start of the project, the engineers are uncertain whether they can achieve the required optical alignment using standard high-volume CMOS manufacturing tools (Capability Uncertainty). They are also uncertain about the optimal geometry for the silicon waveguides to minimize light loss while maintaining the chip’s electrical properties (Design Uncertainty).
3. Process of Experimentation: The team develops four different waveguide designs and tests them using high-fidelity optical simulation software. They then fabricate “test coupons” (small scale prototypes) of the two most promising designs and measure light transmission and signal integrity in the lab. Based on the failures of the first two coupons, they revise the doping concentration of the silicon to improve refractive index control.
4. Technological in Nature: The research relies on physical sciences (photonics and electromagnetics), materials science (silicon doping), and electrical engineering.

The Financial Calculation

InnovateSemis calculates its Oregon-sourced QREs for 2025 as follows:

• Wages: $4,000,000 (Salaries of Oregon-based design engineers).
• Supplies: $500,000 (Materials used in the test coupons).
• Contract Research: $300,000 (Paid to a cleanroom facility in Oregon for fabrication of the test coupons; 65% is eligible).
• Total Oregon QREs: $4,695,000 ($4M + $500k + $195k).

Assuming a calculated base amount of $2,695,000 based on their prior four years of Oregon sales, the credit is figured as:

$$ \text{Excess QREs} = \$4,695,000 – \$2,695,000 = \$2,000,000 $$

$$ \text{Oregon Credit} = 0.15 \times \$2,000,000 = \$300,000 $$

The Certification and Filing Journey

1. By October 15, 2025: InnovateSemis submits its certification application to Business Oregon, paying the $3,000 fee and providing the technical narrative and historical QRE data.
2. Late 2025: Business Oregon issues a certification for $300,000.
3. Early 2026: InnovateSemis files its corporate return, attaching Schedule OR-RESEARCH.
4. Refundability: Because the firm has 140 employees (fewer than 150), 75% of the credit is refundable. If the firm has a tax liability of only $50,000, they would use $50,000 of the credit to zero out their tax and receive the remaining $175,000 of the refundable portion as a cash payment from the DOR ($225,000 \text{ total refundable} – $50,000 \text{ used}). The remaining $75,000 (25% non-refundable) is carried forward.

Judicial Interpretations and “Routine Engineering” vs. Experimentation

While state-specific case law for the 2024 semiconductor credit is still emerging, the Oregon Tax Court’s historical approach to IRC § 41 provides critical insight into how the Four-Part Test will be audited. The most common pitfall for high-tech firms is the failure to distinguish between “routine engineering” and a “process of experimentation.”

In Phoenix Design Group, Inc. v. Commissioner, a significant case involving professional engineers, the court emphasized that simple calculations on available data do not constitute an investigative activity. For a project to pass the “Process of Experimentation” test, the taxpayer must identify a specific information gap that was not addressable through standard technical literature or professional manuals. If an engineer can solve a problem using the “known laws of physics” and standard software tools without needing to test multiple design alternatives to find the best fit, the activity is likely ineligible.

Furthermore, the “Funding Exception” remains a critical hurdle for firms that perform contract design work for others. Under Oregon law, research is considered “funded” (and therefore excluded) if the client’s payment is not contingent on the success of the research activities or if the taxpayer does not retain substantial rights in the intellectual property created. Semiconductor design firms must carefully structure their contracts to ensure they bear the financial risk of technical failure if they intend to claim the state R&D credit.

Impact of the “One Big Beautiful Bill” (OBBB) on 2025 R&D Claims

The federal OBBB Act, signed in July 2025, significantly altered the national R&D landscape by reversing the requirement to amortize research expenses over five years under IRC Section 174. Starting in the 2025 tax year, businesses can once again fully deduct their domestic R&D expenses in the year they are incurred.

For Oregon taxpayers, this change is highly beneficial but adds complexity to tax planning. Because Oregon is a “rolling conformity” state—meaning it automatically adopts changes to the federal definition of taxable income unless the legislature explicitly decouples—Oregon firms can take the full deduction for state excise tax purposes. However, firms must be mindful of IRC § 280C, which Oregon follows. This section prevents a “double benefit” by requiring taxpayers to reduce their deductible expenses by the amount of the R&D credit claimed. Companies must meticulously adjust their state taxable income to reflect this add-back, ensuring that the 15 percent credit does not lead to a mathematical error on their Form OR-20 or Schedule OR-ASC-CORP.

Reporting, Compliance, and Audit Readiness

The Oregon Department of Revenue and Business Oregon emphasize that contemporaneous documentation is the only reliable way to defend an R&D claim during an audit. An audit may occur up to four years after a return is filed, making it essential for firms to maintain detailed records of their technical journey.

Essential Documentation Categories

Taxpayers should maintain a “Research Project File” for each business component that includes:

• Technical Evidence: Email correspondence between engineers discussing technical hurdles, laboratory test results, prototype photographs, and version-controlled software code commits that show the evolution of a design.
• Labor Tracking: Time-tracking data that clearly differentiates between “qualified research” (designing the chip) and “non-qualified activities” (routine production, quality control, or market research).
• The “Shrinking Back” Analysis: If a large project fails the Four-Part Test at the high level (e.g., a whole server system), the law allows the taxpayer to “shrink back” to the most specific sub-component that does meet the test (e.g., a specific high-speed interconnect chip within the server). Documenting this hierarchy is essential for salvaging portions of a claim that might otherwise be disqualified.

The Role of Pass-Through Entities

For semiconductor firms structured as S-corporations or Partnerships, the credit “flows through” to the individual owners. These entities must use Schedule OR-RESEARCH to calculate the total credit and then file Form OR-TFR to pass the credit through to shareholders or partners. Individual owners then claim their pro-rata share on their personal income tax returns (Form OR-40) using the appropriate credit codes. It is important to note that the certification must be held by the entity itself; individual owners cannot transfer the credit to others once it has been allocated to them.

Final Thoughts

The Four-Part Test remains a rigorous and indispensable gatekeeper for Oregon’s semiconductor fiscal incentives. By strictly aligning with federal standards, Oregon ensures that its $80 million biennial investment in chip innovation is directed toward activities that involve genuine technical risk and systematic experimentation. The tiered refundability system and the pre-certification requirement with Business Oregon distinguish the state’s approach from the more general federal program, reflecting a targeted industrial policy aimed at nurturing the state’s most critical high-tech ecosystem.

As the program approaches its 2029 sunset, the high rate of oversubscription suggests that the semiconductor industry has successfully integrated these credits into their long-term R&D planning. However, the complexity of the Four-Part Test, combined with the nuances of market-based sourcing and the shifting federal treatment of Section 174, demands that Oregon firms maintain a high level of technical and financial sophistication. Ultimately, the success of a claim depends less on the total dollars spent and more on the ability to narrate a clear story of technical uncertainty resolved through the disciplined application of scientific principles. Firms that prioritize contemporaneous documentation and rigorous adherence to the four pillars will be best positioned to maximize their benefit and defend their innovation during regulatory scrutiny.