A common question is whether testing costs count for the federal R&D tax credit under Section 41. The short answer is that testing costs may relate to the credit when the testing is part of a process of experimentation directed at eliminating a technical uncertainty about a business component. The costs that may be taken into account include certain wages, certain supplies, and certain contract research — but routine quality-control testing generally is not qualified research. This page explains the framework in general terms. It is educational and is not individualized advice. For the foundational cost framework, see our page on qualified research expenses.
Testing as Part of Experimentation
Under the Treasury Regulations (§1.41-4), a process of experimentation is an evaluative process designed to evaluate one or more alternatives to achieve a result where the capability, method, or appropriate design is uncertain. Testing is often the mechanism through which alternatives are evaluated — for example, testing alternative materials, designs, or process parameters to determine which achieves the desired result. Testing that is part of such an evaluative process may be part of qualified research, provided all four elements of the four-part test are satisfied.
Which Costs May Be Taken Into Account
If the testing constitutes qualified research, the costs that may be taken into account are the same qualified research expense categories that apply to any qualified research activity:
- In-house wages — certain wages of employees who perform or directly support the qualified research testing, subject to the qualified-services rules (direct research, direct supervision, direct support). For more, see our page on employee wages.
- Supplies — certain tangible materials consumed or used in the testing, subject to the statutory supply definition. For more, see our page on supplies.
- Contract research — certain amounts paid to outside parties that perform qualified research testing on behalf of the taxpayer, subject to the economic-risk and rights-to-results rules. For more, see our page on contractor costs.
Development Testing vs. Routine Quality Control
A central distinction is between development testing and routine quality control. Development testing — testing performed to evaluate alternatives and resolve a technical uncertainty during the development of a business component — may be part of qualified research. Routine quality-control testing — testing performed to verify that a known product meets established specifications — generally is not qualified research, because there is no technical uncertainty about the capability, method, or design being resolved through a process of experimentation.
The distinction turns on whether there is a genuine technical uncertainty and whether the testing is part of an evaluative process of alternatives. "We test every batch" is not automatically R&D, because routine batch testing to verify conformance to known specifications generally does not involve eliminating a technical uncertainty. For a deeper treatment of this distinction, see our page on routine testing vs. R&D experimentation.
Testing After Commercial Production
Section 41 and the Treasury Regulations address research conducted after commercial production begins. Testing performed after the business component has reached commercial production — for example, routine quality assurance on a production line — generally falls within the post-commercial-production exclusion and may not be qualified research. Testing performed during the development phase, before commercial production, is more likely to be part of qualified research, provided the other elements are met. For more, see our page on qualified research.
Hypothetical Example
Consider a company developing a new adhesive formulation and is uncertain whether the formulation can achieve the required shear-strength target across a range of temperatures. The company prepares several alternative formulations, tests each at multiple temperatures, and evaluates the results against the target. The wages of the technicians performing the tests, the materials consumed in the test specimens, and any outside laboratory costs for specialized testing may warrant review as qualified research expenses, provided the underlying activity constitutes qualified research.
By contrast, if the same company later runs routine batch tests on its production adhesive to verify that each batch meets the established specification, those testing costs generally would not be qualified research expenses, because the testing is verifying conformance to a known standard rather than evaluating alternatives to eliminate a technical uncertainty.
This example is illustrative only and does not state that the costs definitely qualify.
Documentation That May Help
Records that can help support testing-cost claims include test plans describing the uncertainty and alternatives being evaluated, test results and data, records of which personnel performed the testing, material usage records, and records connecting the testing to specific business components and qualified activities. For more, see our page on R&D tax credit documentation.
Key Takeaway
Testing costs may relate to the R&D tax credit when the testing is part of a process of experimentation directed at eliminating a technical uncertainty. The costs that may be taken into account include certain wages, certain supplies, and certain contract research. Routine quality-control testing and testing after commercial production generally are not qualified research. Because these determinations are fact-specific, professional review is appropriate before claiming the credit.