The R&D Tax Credit is back! Find out how the Big Beautiful Bill Act can fund your R&D. Learn More
%201.svg)
.svg)
.svg)
.svg)
Last Updated: September 2026
A business activity may qualify for the R&D tax credit if it meets the IRS requirements for qualified research. These requirements are commonly known as the Four-Part Test: the research must relate to a permitted purpose, rely on hard-science technological principles, address technical uncertainty, and involve a process of experimentation. The test generally needs to be applied separately to each business component, such as a product, process, software program, technique, formula, or invention.
That is why the R&D tax credit is not limited to scientists in laboratories. Software developers, engineers, manufacturers, architects, product development teams, and companies in many other industries may perform qualified research during normal business operations.
The important question is not whether your company calls the work "R&D." It is whether the work itself meets the requirements of Section 41.
The Four-Part Test is used by the IRS to determine whether an activity meets the federal definition of qualified research.
In general, the research must meet all four requirements:
The IRS requires these tests to be considered at the business-component level, rather than simply labeling an entire department or company as R&D.
That distinction matters. A software company does not automatically qualify because it employs developers or computer engineers. A manufacturer does not automatically qualify because it has engineers. You must look at the specific development work being performed.
The permitted purpose test looks at what the taxpayer is trying to create or improve.
Research can meet this part of the test when it is intended to improve the function, performance, reliability, or quality of a business component. A business component can be a product, process, computer software, technique, formula, or invention.
For example:
The development does not necessarily have to result in something completely new. Improvements to existing products, software, and processes can also qualify.
What generally does not satisfy this requirement are changes related only to style, taste, cosmetics, aesthetics, or other nontechnical preferences.
The research must fundamentally rely on principles of engineering, computer science, physical science, or biological science.
That sounds more complicated than it needs to be.
You do not have to invent new science. Your team can use established engineering or computer science principles to solve a technical problem where the answer is not readily available.
A software team, for example, might be trying to determine how to enhance an architecture so an application can handle substantially more users without sacrificing performance.
A manufacturer might experiment with different materials, temperatures, configurations, or production methods to achieve a required result.
What matters is that the problem and the work used to solve it are technical.
Market research, management studies, customer preference surveys, and similar activities do not become qualified research simply because they happen alongside a technical development project. The tax law specifically excludes certain surveys and studies, as well as research in the social sciences, arts, and humanities.
Technical uncertainty exists when the information available at the beginning of a project does not establish whether something can be done, how it should be done, or what the appropriate design should be.
In practice, uncertainty often falls into three areas:
Consider two software projects.
In the first example, a developer is asked to add a standard login page using an established process the team has used many times. It takes time to build, but the technical approach is already known.
In the second project, a development team needs its platform to process a much larger volume of real-time data. The team does not know whether the existing architecture can meet the required speed. Engineers evaluate different database structures, caching approaches, and system architectures to find a workable solution.
The second example presents a much clearer case of technical uncertainty.
Difficulty and uncertainty are not the same thing. A project can be expensive, complicated, or time-consuming without necessarily involving qualified research.
Once your team identifies a technical uncertainty, it must evaluate alternatives to try to overcome it.
That is the process of experimentation.
Experimentation might include:
The IRS describes the experimentation requirement as a process designed to evaluate one or more alternatives to achieve the desired result when the appropriate capability, method, or design is uncertain. The important word here is process.
Simply encountering a technical problem does not automatically create qualified research. Your team should be able to explain what alternatives it considered and how it evaluated them.
No. A research project does not have to succeed to potentially qualify.
Your team might build three prototypes and reject all three. Engineers might test an architecture and discover that it cannot meet the required performance. A manufacturer may experiment with a material and ultimately decide not to use it.
Those failures can still be part of the experimentation process. In fact, failed approaches can help show that the outcome was not known from the beginning.
The question is whether the activities met the Four-Part Test while the research was being performed, not whether the project ultimately became commercially successful.
Qualified research can look very different from one company to another.
Potential activities include developing new functionality, testing system architectures, improving scalability or performance, developing proprietary algorithms, addressing cybersecurity challenges, and experimenting with AI or machine learning systems.
Potential activities include designing prototypes, testing materials, developing new production processes, improving manufacturing efficiency through technical changes, and experimenting with methods for reducing defects.
Potential activities can include evaluating alternative technical designs, modeling solutions to engineering challenges, testing materials or systems, and resolving technical constraints associated with a project.
The key across all of these examples is that industry does not determine eligibility. Activities do.
Not everything associated with innovation, engineering, or product development is qualified research.
Section 41 excludes certain activities, including:
Routine work may also fall outside the Four-Part Test because it does not involve the required technical uncertainty and experimentation.
Examples can include, but are not limited to the following:
One particularly important rule for companies with distributed teams is that foreign research is excluded from the federal research credit.
No. Determining that an activity is qualified research is only one part of calculating the credit.
You also have to determine which costs associated with that research are Qualified Research Expenses, or QREs.
Depending on the circumstances, QREs can include certain:
The current Form 6765 instructions break QRE reporting into these categories and require taxpayers subject to Section G reporting to associate QREs with business components.
That means a $1 million development project does not automatically produce $1 million of QREs.
The company first determines which activities qualify and then identifies the eligible expenses connected to those activities.
Good support documentation connects the qualified activities your team actually performed to meet the Four-Part Test.
Depending on the company and project, supporting records may include:
The goal is to establish a clear connection between the business component, qualified activities, individuals performing those activities, and expenses being claimed. IRS audit guidance similarly emphasizes the connection between qualified activities and the QREs associated with each business component.
For tax years beginning after 2025, documentation at the business-component level is particularly important. Section G of Form 6765 is now required for taxpayers subject to its reporting rules, with QREs reported by business component under the IRS's 80%/Top 50 methodology.
Potentially, yes. Many states have their own research credit programs, but eligibility, calculations, qualifying expenses, filing requirements, and other rules vary by state.
That means qualifying for the federal credit does not automatically determine the amount of state credit available.
If your company performs research in multiple states, review the rules where the work is actually being performed. TaxTaker has state-specific guides for businesses conducting R&D in states including California, Texas, and New York.
How Can You Tell If Your Company Might Qualify?
A useful first step is to talk to the people actually doing the technical work.
Ask:
Specific answers to those questions can help identify projects worth evaluating under the Four-Part Test.
If the answers mostly involve routine implementation, aesthetics, marketing decisions, or standard maintenance, the activities may be less likely to qualify.
Meeting the Four-Part Test is the starting point, not the entire R&D tax credit calculation.
Once potentially qualified research has been identified, the next steps are to determine which expenses qualify, calculate the credit, gather supporting documentation, and report the claim correctly.
If you want to understand the numbers next, see How to Calculate R&D Tax Credit: A Quick Example Guide.
Companies should also review qualification throughout the year rather than waiting until tax season. Development teams change projects, employees move between activities, and supporting documentation can become harder to reconstruct months later.
TaxTaker helps companies evaluate their R&D activities against the Four-Part Test, identify QREs, calculate available credits, and prepare the documentation needed to support the claim.
Book a call with TaxTaker to find out whether your company's research and development activities may qualify.
The Four-Part Test evaluates whether research meets four requirements: permitted purpose, technological nature, elimination of uncertainty, and process of experimentation. All four requirements generally must be satisfied for an activity to constitute qualified research under Section 41.
It can. Software development may qualify when the underlying activities meet the Four-Part Test. Developing new functionality, testing alternative architectures, improving scalability, or resolving technical performance challenges may present qualifying activities, while routine coding or maintenance does not automatically qualify.
Yes. Eligibility for qualified research is based on the activities being performed, not simply the size of the company. Certain qualified small businesses may also elect to apply up to $500,000 of research credit against payroll tax liability, subject to the applicable requirements.
No. A project does not have to result in a successful product for the underlying research to qualify. Failed prototypes, rejected approaches, and unsuccessful tests can still be part of a qualifying process of experimentation if the other Section 41 requirements are met.
No. Receiving or applying for a patent does not automatically establish eligibility for the R&D tax credit. The underlying research activities still need to meet the requirements of Section 41.
.png)
Rachel Darrough is a Sr. R&D Manager with nearly 10 years of experience conducting federal and state R&D tax credit studies across various industry types, e.g., manufacturing, software, engineering, and construction. Rachel received a Bachelor's Degree in Managerial Finance and brings a strong technical foundation to evaluating qualified research activities, technical uncertainty, and experimentation under IRC §41. At Tax Taker, Rachel manages R&D engagements by collaborating with technical and finance teams to identify qualified expenditures, substantiate eligibility, and optimize credit outcomes. She applies an analytical approach to documentation and methodology while ensuring compliance with IRS guidance. Rachel is committed to helping clients leverage innovation-driven incentives to reduce tax liability and reinvest in continued R&D.
.svg)
