When companies look at the R&D tax credit, they often start with expenses: engineer salaries, prototype materials, cloud computing costs, or outside contractors. But this starts the analysis in the wrong place.
The R&D credit begins with activities, not expenses. First, you identify the work that qualifies under Section 41. Then you determine which costs connect to that work and meet the separate qualified research expense (QRE) rules. The IRS itself treats these as distinct questions when examining research credit claims.
Think of it as activities vs. expenses: “What did your team do?” vs. “What did you spend to do it?” This guide stays on the first question.
If this introduction has left you with more questions than answers, first read What is R&D in Business? Conversely, if you've already identified your qualifying work, continue to R&D Tax Credit Qualified Expenses for the cost side of the calculation.
Read on for answers to the following questions:
- What are R&D tax credit qualified activities?
- How does the IRS define a qualifying activity?
- What are examples of qualifying R&D activities by industry?
- What are some activities that don’t qualify?
- How do you document qualifying activities for R&D tax credit?
- How do you turn qualified activities into credit?
What Are Qualified Research Activities for the R&D Tax Credit?
Qualified research activities are activities that satisfy Section 41's requirements for qualified research and avoid its specific exclusions. Broadly, the work must relate to developing or improving a business component, use technological principles, and use experimentation to resolve uncertainty about function, performance, reliability, quality, capability, method, or design.
The most useful place to begin is the business component.
Section 41 defines a business component as a product, process, computer software, technique, formula, or invention that a company plans to sell, lease, license, or use in its own business.
That means a company does not simply say, “We are innovative, so our engineering department qualifies.”
Instead, you might analyze:
- A software company's new recommendation engine.
- A manufacturer's redesigned production process.
- A food company's reformulated shelf-stable product.
- An engineering firm's new structural solution for a project.
Then you look at what the team actually did to develop or improve that component.
The IRS also reminds us of two important points:
- Job titles do not decide the answer. A founder can perform qualifying research. So can a machinist, developer, formulation scientist, or engineer. Conversely, putting “R&D” in someone's title does not make all of their work eligible.
- Success is not required either. A failed prototype or abandoned technical approach can still involve qualifying research if the underlying activities satisfy the Section 41 rules. The IRS focuses on the uncertainty identified, the alternatives considered, and the process used to evaluate them.
How Does the IRS Four-Part Test Apply to R&D Activities?
The IRS four-part test asks whether the research connects to eligible research expenditures, seeks technological information for a new or improved business component, serves a permitted purpose, and includes a process of experimentation. You apply the test to each business component, and the activity must also avoid Section 41's statutory exclusions.
For a more thorough explanation of each prong, see The R&D Tax Credit Four-Part Test. The important point here is that the test applies to activities, not simply projects or departments. Here, we’ll just give brief examples to illustrate what each means:
Qualification |
Definition |
Example |
|
Permitted purpose |
The research aims to develop or improve a business component's function, performance, reliability, or quality |
An engineering team redesigns a production process to improve its reliability |
|
Technical uncertainty |
You are unsure how and if the desired result can be achieved |
A software team knows the performance target it needs to hit but doesn't know which architecture can achieve it |
|
Process of experimentation |
Your team identifies the uncertainty, considers one or more alternatives, and evaluates those alternatives |
Engineers build and test alternative prototypes to determine which design meets the required specifications |
|
Technological in nature |
The experimentation must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science |
A manufacturer applies established engineering principles while testing different materials for a new component |
Note here that the One Big Beautiful Bill Act (OBBBA) also changed the surrounding research-expense law. The new Section 174A allows deductions for domestic research or experimental expenditures paid or incurred in tax years beginning after 2024. Section 41's current qualified-research definition now references domestic research or experimental expenditures under Section 174A.
What Are Examples of Qualifying R&D Activities?
Qualifying R&D activities can occur in software, manufacturing, engineering, life sciences, consumer products, agriculture, and other industries. The industry itself does not create the credit. The activity needs to satisfy the Section 41 requirements, such as resolving technological uncertainty through experimentation, and it cannot fall within one of the statutory exclusions.
Here are some common activities worth evaluating. Several of these industries have their own examples page that you can consult for further guidance:
Industry |
Activities thatmay qualify |
Activities toseparate out |
|
Designing algorithms, testing architectures, improving scalability, resolving integration or performance uncertainty |
Routine maintenance, ordinary bug fixes with a known solution, certain internal-use software |
|
|
Developing production techniques, testing materials, prototyping tooling, improving yield through technical experimentation |
Routine inspections, ordinary quality control, copying an existing process |
|
|
Evaluating structural alternatives, developing technical systems, modeling solutions to engineering constraints |
Purely aesthetic work, standard drafting, adapting an existing design without technical experimentation |
|
|
Life sciences & medical devices |
Formulation work, prototype development, testing device performance, evaluating technical alternatives |
Routine post-production testing or excluded funded work |
|
Food & CPG |
Developing formulas, testing ingredients for stability or performance, improving manufacturing methods |
Taste-only changes, market testing, seasonal packaging changes |
|
Breweries & beverage companies |
Testing fermentation methods, shelf stability, production equipment, or technically uncertain formulas |
Consumer preference surveys or routine batch quality checks |
|
Agriculture & agtech |
Developing equipment, irrigation technology, biological processes, or technically uncertain production methods |
Ordinary production activities without experimentation |
These examples are starting points, not automatic qualifications. For more examples of R&D tax credits by industry, peruse this overview of R&D Tax Credit Examples for Top Industries.
Or simply select your industry from the drop-down menu below.
What Agricultural Activities Qualify?
Many agribusiness companies perform activities that qualify for the R&D tax credit without realizing it. Examples include:
- Experimenting with or developing new fertilizers
- Hybridizing or developing new strains of crops, plants, or livestock, including developing new gene transfer techniques
- Developing new feeds or feeding techniques for livestock
- Implementing new ways to protect crops or livestock from disease
- Improving harvesting practices, such as automating processes
- Implementing precision farming techniques in attempt to increase yield and/or production efficiency
- Developing and implementing new irrigation systems
- Implementing new equipment to improve harvest cycle times
- Working to optimize the treatment and management of farm wastes in an energy efficient manner
IRS tax regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
What Architecture Activities Qualify?
Many architecture firms perform activities that qualify for the R&D tax credit without realizing it. Examples include:
- Developing new or improved designs
- Evaluating alternative designs to meet or overcome complex client requirements, site conditions, or building codes
- Evaluating alternative designs and materials for structural or energy optimization, and/or to achieve LEED certification
- Determining or testing optimal designs for lighting, acoustical, or visual qualities within a structure
- Using building information modeling and computational analysis tools to assess designs for various functional requirements
- Developing schematic designs, site plans, and elevation drawings
- Designing areas for building systems • Developing environmentally friendly buildings
IRS tax regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
What Biotechnology Activities Qualify
Many biotech firms perform activities that qualify for the R&D tax credit without realizing it. Examples include:
- Developing computational techniques to advance bioinformatics
- Creating new or enhanced production processes utilizing enzymes
- Developing or enhancing genetic modification tools or techniques for agriculture or livestock
- Developing new or improved cultivation of plants through micro-propagation or genetic modification
- Developing new or improved processes to degrade contaminants in a polluted environment
- Developing biosynthetic processes to convert substrates into more complex products
- Designing new biomaterials to support tissue formation for medical application
- Developing new or improved gene therapy procedures
- Testing to satisfy regulatory requirements
IRS tax regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
What Construction Activities Qualify?
Many construction companies perform activities that qualify for the R&D tax credit without realizing it. Examples include:
- Design and development of electrical, plumbing, HVAC, and energy-efficient systems
- Design and development of buildings, structures, and related components
- Design and development of temporary systems such as shoring, falsework, and dewatering systems
- Development of new or improved processes, methods, and techniques used in the construction process
- Pre-construction planning, including structure, facility, or plant production design
- Development or improvement of equipment
- BIM modeling for design or sub-system coordination
- Improvements to a building’s ability to withstand seismic events or extreme weather
IRS tax regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
What Dentistry Activities Qualify?
Dentists perform many activities that qualify for the R&D tax credit. Examples include:
- 3D printing
- Platelet Rich Plasma/Platelet Rich Fibrin (PRP/PRF) treatment development
- Utilizing an on-site milling machine or in-house lab
- Utilizing and making improvements to technologies
- Creating new or improved processes, techniques, or methods
- Creating and testing prototypes
- Experimenting with alternative materials or attachment systems
- Intra-oral scanning technology
- Use of technology to accelerate time of treatment and fit of custom orthotics/prosthetics
- Nylon appliance development
IRS tax regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
What Engineering Activities Qualify?
Many engineers perform activities that qualify for the R&D tax credit without realizing it. Examples include:
- Building information modeling
- Improving or determining alternative structural designs or systems
- Developing sustainable designs
- Testing designs
- Developing and testing new materials
- Environmental design and impact studies
- Developing and testing waste disposal processes
- Developing or improving alternative heating, cooling, ventilation, lighting, water, or electricity systems
- And more…
IRS tax regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
What Food & Beverage Activities Qualify?
Many food & beverage manufacturers perform activities that qualify for the R&D tax credit without realizing it. Examples include:
- Designing and developing new or improved processes to maintain quality and safety, meet regulations, reduce costs, or improve consistency
- Testing of product ingredient mixtures for desired flavor or aroma
- Designing and developing new products to make traditional products healthier
- Developing or redesigning packaging to improve shelf life, sustainability, or durability
- Developing new processes and techniques for the production of new food products, including mixing times, batching sequences, and cooking temperatures and durations
- Development of new or improved preservative chemicals
- Improving existing production processes to improve efficiency and reduce waste, or to convert waste into energy
IRS tax regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
What FinTech Activities Qualify?
Some fintech companies perform activities that qualify for the R&D tax credit without realizing it. Some examples of qualifying activities include:
- Designing and developing algorithms, collateral tracking systems, and research and simulation platforms
- Developing exchange gateways or connectivity
- Researching and developing expense analysis and monitoring systems, feed handlers, and quoting systems
- Creating new or improved financing, cash, and trading platforms
- Developing new tools and systems for portfolio management, predictive analytics, and risk management
- Developing pricing, relative value, and volatility tools and systems
- Building quantitative research models and tools
IRS tax regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
What Manufacturing Activities Qualify?
Many manufacturers perform activities that qualify for the R&D tax credit without realizing it. Some examples of activities that often qualify include:
- Improving product quality
- Development of second generation products
- Product development using computer-aided design tools
- Tooling and equipment fixture design and development
- Optimizing manufacturing processes
- Designing manufacturing equipment
- Designing, constructing, and testing prototypes
- Designing and developing cost-effective operational processes
- Alternative material testing
- Evaluating and determining the most efficient flow of material
- Increasing manufacturing capabilities and production capacities
- Achieving compliance with changing emission regulations
IRS tax regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
What Activities Qualify?
Medical device companies perform many activities that qualify for the R&D tax credit. Examples include:
- Developing engineering drawings and specifications
- Performing CAD modeling
- Developing second-generation or improved products
- Tooling and equipment fixture design and development
- Conducting new product development and design
- Developing unique computer numerical control programs
- Developing a high-volume packaging process for use with a sterilized medical product
- Developing equipment that satisfies increasing regulatory requirements
- Programming software, compiling, and testing source code for firmware
- Conducting unit, integration, functional, and performance testing
- Conducting clinical tests to satisfy government regulatory requirements prior to commercialization
- Generating prototypes and first articles of new products for testing and validation
- Implementing automation processes or robotics
- And so on…
IRS tax regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
What Pharmaceutical Activities Qualify?
Many pharmaceutical companies perform activities that qualify for the R&D tax credit without realizing it. Examples include:
- Conducting drug research
- Testing for quality assurance during development
- Developing new compounds through pre-clinical and discovery research
- Improving automation processes
- Designing and building prototypes
- Improving existing products, in areas such as extending shelf life, packaging, and reducing side effects
- Designing and developing drug delivery systems
- Working on developments and research to comply with federal regulations
- Manufacturing and packaging trials for new products
IRS tax regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
What Software Development Activities Qualify?
Many software developers perform activities that qualify for the R&D tax credit without realizing it. Examples include:
- Designing and developing new or improved technologies, algorithms, applications, or database
- Programming code
- Designing and developing software architecture
- Developing operating systems and compilers
- Creating mockups, UX design, or technical design work
- Testing automation to ensure quality during development
- Establishing functional relationships between software modules for internal use or to better serve clients
- Compiling, programming, and testing software source code
- Developing feature enhancements
- Improving internal processes and conducting QA testing during development
IRS tax regulations outline a straightforward 4-part test that creates a fairly low bar for qualification.
What R&D Activities Don't Qualify for the Credit?
Section 41 specifically excludes several activities even when the work feels like R&D. IRC Section 41(d)(4) excludes research after commercial production, customer-specific adaptation, duplication, certain surveys and management studies, routine data collection and quality control, certain internal-use software, foreign research, social-science research, and research funded by another party.
This is where companies often need to draw much sharper lines:
Potentially Qualifies |
Doesn’t Qualify |
|
Developing a new product or process: Designing and testing a new product, software feature, formula, or production process when technical uncertainty exists |
Research after commercial production: Routine work performed after the business component has reached commercial production |
|
Improving an existing business component: Experimenting to improve a product or process's function, performance, reliability, or quality |
Customer-specific adaptation: Adapting an existing business component to meet a particular customer's requirement or need |
|
Testing alternative designs: Modeling, simulating, prototyping, or systematically testing alternatives to resolve technical uncertainty |
Duplication: Reproducing an existing business component from plans, specifications, physical examination, or publicly available information |
|
Collecting data as part of experimentation: Gathering and analyzing data when it forms part of the process used to evaluate technical alternatives |
Routine data collection or quality control: Collecting data or testing products against established standards without resolving technical uncertainty |
|
Solving technical problems: Using engineering, computer science, or physical or biological science to evaluate potential solutions to an uncertain technical problem |
Surveys and certain studies: Efficiency surveys, management studies, market research, advertising, promotions, and similar activities |
|
Conducting qualifying research in the U.S.: Performing otherwise qualified research within the United States, Puerto Rico, or a U.S. possession |
Foreign research: Research conducted outside the United States, Puerto Rico, or a U.S. possession |
|
Research grounded in eligible sciences: Experimentation fundamentally relying on engineering, computer science, or physical or biological sciences |
Social sciences, arts, or humanities research: Research in these fields falls within Section 41's statutory exclusions |
|
Contract research where the taxpayer satisfies the applicable rules: Depending on the contractual arrangement, research performed for another party can warrant a Section 41 analysis |
Funded research: Research can be excluded when another party funds it under the Section 41 rules. The contract and facts determine the result |
The most common trip ups
1. Research after commercial production
Section 41 excludes research conducted after the beginning of commercial production of the business component. That does not mean a product can never generate qualifying research again once you sell version one. A later project may involve a genuinely new or improved business component or qualifying improvement. The point is that routine work after commercial production does not become eligible merely because engineers continue touching the product.
Companies should therefore mark where development work transitions into ordinary production, maintenance, or support.
2. Funded research
The funded-research exclusion deserves special attention for contractors, engineering firms, manufacturers, and businesses doing development work for customers. Section 41 excludes research to the extent another person or government entity funds it. However, the actual analysis depends heavily on the contract.
IRS guidance focuses on issues such as whether payment depends on successful research and whether the party performing the research retains substantial rights in the results. So “the customer paid us” does not answer the funded-research question by itself. You need to read the agreement.
That makes statements of work, IP provisions, payment terms, and risk allocation important records for an R&D credit review.
How Should You Document Qualified R&D Activities?
To claim qualifying activities, document them at the business-component level with contemporaneous records: project notes, design iterations, test results, and time tracking that tie the technical work to the four-part test. Good documentation connects each qualified activity to its qualified research expenses and is your best defense if the IRS examines the claim.
The key word is connection. You must be able to demonstrate where your activities connect with qualifications. Unfortunately, a $2 million engineering payroll number does not prove a $2 million pool of qualified research expenses. The IRS has specifically warned about claims that fail to establish a nexus between expenses and qualified research activities.
A better record tells the story at the business-component level. Consider this example list as a method for drawing up the necessary items for filling:
- Business component: New inventory optimization engine
- Technical uncertainty: Whether the proposed architecture could process required volumes within the target response time
- Activities: Benchmarking, modeling, load testing, alternative architecture tests, iterative redesign
- Result: Final architecture selected after two approaches failed performance targets
- Related costs: Qualified wages and other potentially eligible expenses tied to those activities
Then your QRE analysis answers the separate expense question.
For more on that side, see R&D Tax Credit Qualified Expenses.
Form 6765 makes business-component records more important in 2026
For tax years beginning after 2025, the IRS's current Form 6765 instructions require Section G for many filers. Subject to the stated exceptions, taxpayers must report business-component information covering at least 80% of total QREs, with no more than the top 50 business components individually reported.
The IRS also tells taxpayers to use business-component names or identifiers that align with the books and records used to substantiate the activities and associated QREs.
There are exceptions. For example, the current instructions exempt certain original-return filers from Section G when total controlled-group QREs do not exceed $1.5 million and average annual gross receipts for the prior three tax years do not exceed $50 million. Qualified small businesses making the specified reduced payroll-tax-credit election also receive an exception under the current instructions.
You do not need to turn every engineering meeting into a tax memo. You do want records created in the normal course of business that let someone reconstruct what technical question the team was solving, what alternatives it considered, and how the claimed expenses relate to that work.
For the filing mechanics, continue to our IRS Form 6765 Ultimate Guide.
Turning Qualified Activities Into an R&D Tax Credit
For many SMBs, the opportunity to capture credits sits in work they already perform but do not call “R&D.” A software company may call it architecture work. A manufacturer may call it process improvement. A food business may call it formulation. The label matters far less than the underlying activity.
The takeaway: reframing the way your company thinks of qualifying activities reduces the risk of leaving money on the table.
Arvo helps companies make that analysis practical. Our R&D tax credit work starts with what your team actually did, then connects those activities to the financial records needed to calculate and support the claim. If you're ready to start sketching out a solid filing plan, start with Arvo's R&D Tax Credit Calculator. Beyond this, learn more about R&D Tax Credit Consulting Services.
[The R&D tax credit] is a really great approach to actually incentivize people to do things that are creative and innovative…It made obvious sense to work with Arvo because it meant that we could actually get our work done quicker.”
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