A common question is whether the activity of developing new tools or equipment can constitute research and development for the federal R&D tax credit under Section 41. The short answer is that designing or improving tools or equipment may constitute qualified research when there is a technical uncertainty about the capability or design of the tool or equipment, and the work involves a process of experimentation. Purchasing commercially available equipment is not qualified research. 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.
Developing Equipment as a Business Component
Under Section 41(d)(2), a business component includes a product, process, or invention. A new tool or piece of equipment can be a business component — the thing the research is intended to develop or improve. If a company is designing a new type of tool or equipment, and there is a technical uncertainty about whether the tool can achieve a specific capability or performance target, the development work may warrant review as qualified research, provided the four-part test is satisfied.
Engineering Uncertainty and Experimentation
The development of new tools or equipment may warrant review when:
- There is a technical uncertainty — a question about the capability, method, or appropriate design of the tool or equipment.
- The work is technological in nature — the process of inquiry relies on engineering or scientific principles.
- There is a process of experimentation — the work evaluates alternative designs through prototyping, testing, modeling, or systematic trial and error.
- The purpose is to develop or improve the tool or equipment — the work is directed at a new or improved function, performance, reliability, or quality.
For more on these elements, see our pages on the four-part test and process of experimentation.
Equipment Developed for Own Use vs. for Sale
The analysis may differ depending on whether the equipment is developed for the taxpayer's own use or for sale to others. Equipment developed for the taxpayer's own use may raise internal-use-software considerations if software is involved (see our page on internal-use software). Equipment developed for sale to others is evaluated under the regular four-part test. In both cases, the question is whether the development activity constitutes qualified research.
Distinction From Purchasing Commercially Available Equipment
Purchasing commercially available equipment — buying a finished machine or tool from a supplier — is not qualified research. There is no process of experimentation directed at eliminating a technical uncertainty about a business component; the taxpayer is acquiring a known product. This is true even if the equipment is used in research; the purchase of the equipment is not itself qualified research. For more on the cost treatment of purchased equipment, see our page on equipment costs.
Hypothetical Example
Consider a company that manufactures custom fixtures and is developing a new type of automated test fixture for a customer's product line. The company is uncertain whether the fixture's sensor array can achieve the required measurement accuracy across a range of operating temperatures. The company designs alternative sensor configurations, builds prototype fixtures, tests them at multiple temperatures, and iterates the design based on the results. This development work — evaluating alternative designs to resolve a technical uncertainty about the fixture's capability — may warrant review as qualified research. The wages of the engineers designing and testing the fixtures may be qualified research expenses, provided the other elements are met.
By contrast, if the same company purchases a commercially available sensor array and installs it in a standard fixture design, that is not qualified research — it is acquiring and assembling known components.
This example is illustrative only and does not state that the activity definitely qualifies.
Documentation That May Help
Records that can help support tool and equipment development claims include design documents, records of the technical uncertainty, prototype test plans and results, records of alternative designs evaluated, and records connecting the development work to the specific tool or equipment business component. For more, see our page on R&D tax credit documentation.
Key Takeaway
Designing or improving new tools or equipment may constitute qualified research when there is a technical uncertainty about the capability or design of the tool or equipment, and the work involves a process of experimentation. Purchasing commercially available equipment is not qualified research. Because these determinations are fact-specific, professional review is appropriate before claiming the credit.