A common question is the difference between production problems and qualified research for the R&D tax credit. The short answer is that routine production problems that apply known fixes to known issues generally are not qualified research. Production problem investigation that involves an uncertain technical problem and a process of experimentation may warrant review. This page explains the framework in general terms. It is educational and is not individualized advice. For the foundational framework, see our page on qualified research.
Routine Production Problems
Routine production problems — diagnosing a known problem with a known cause and applying a known fix — generally are not qualified research. The characteristics include:
- Known problem — the problem is familiar and has been seen before.
- Known cause — the cause is established.
- Known fix — the fix is established and is applied routinely.
Where all three are present, the work is applying established knowledge, not conducting research.
Production Problems That May Warrant Review
Production problem investigation may warrant review when it involves an uncertain technical problem and a process of experimentation:
- Uncertain problem — the problem is new or unfamiliar, and the cause is not established.
- Uncertain cause — the root cause is uncertain, and alternative hypotheses need to be evaluated.
- Uncertain fix — the fix is not established, and alternative corrective approaches need to be tested.
Where the investigation involves evaluating alternative root-cause hypotheses and testing corrective approaches through a structured process, the work may warrant review as qualified research. For more, see our page on troubleshooting vs. R&D.
The Commercial-Production Consideration
Production problems that occur after commercial production has begun may also be subject to the commercial-production exclusion under Section 41(d)(4)(A). However, if the investigation is directed at developing an improved business component through a new process of experimentation, it may warrant review as separate qualified research. For more, see our page on research after commercial production.
Hypothetical Example
Consider a manufacturer that experiences a new, unfamiliar production problem and is uncertain of the cause. The company evaluates alternative root-cause hypotheses, tests each, and develops a corrective approach through a structured process. This investigation may warrant review as qualified research.
By contrast, if the manufacturer experiences a known production problem with a known cause and applies a known fix, that is routine production work, not research.
These examples are illustrative only and do not state whether any particular activity qualifies.
Key Takeaway
Routine production problems that apply known fixes to known issues generally are not qualified research. Production problem investigation that involves an uncertain technical problem and a process of experimentation may warrant review. Because the distinction is fact-specific, professional review is appropriate before claiming the credit.