Q: What happens if my activity scores below 70 on any test?

**Failing any single test disqualifies the entire activity from R&D credit.** If any test scores below 70, you have three options: **1. Don't claim the credit** (safest option) • Activities that fail any test are not qualified research • Claiming disqualified activities risks penalties and interest • Could trigger broader audit of other R&D claims **2. Improve and re-evaluate** (if borderline 60-69) • Gather additional documentation and evidence • Refine project definition to focus on qualifying elements • Separate qualifying research from non-qualifying activities • Work with R&D tax specialist to strengthen case **3. Restructure the project** (if fundamentally flawed) • Some project elements may qualify while others don't • Extract qualifying research activities from larger project • Document technical uncertainty more explicitly • Implement systematic experimentation methodology The tool provides specific recommendations based on which tests failed and why. Address these issues before claiming credit to minimize audit risk.

Question 1

What is the four-part test for qualified research?

Accepted Answer

The four-part test is the IRS framework for determining if research activities qualify for the R&D tax credit under IRC Section 41(d). All four parts must be satisfied:

1. **Section 174 Test**: Activities must be experimental or investigatory in nature, intended to discover information useful in developing or improving a business component

2. **Technological in Nature**: Research must fundamentally rely on principles of physical or biological sciences, engineering, or computer science

3. **Business Component**: Research must relate to development of a new or improved business component (product, process, software, technique, formula, or invention)

4. **Process of Experimentation**: Must involve systematic evaluation of alternatives through modeling, simulation, systematic trial and error, or other methods to resolve technical uncertainty

Failure to meet any single test disqualifies the activity.

Question 2

What are common activities that DON'T qualify?

Accepted Answer

The IRS specifically excludes certain activities from R&D credit qualification:

• **Routine or ordinary improvements**: Minor modifications or cosmetic changes without technical uncertainty
• **Adaptation of existing technology**: Using known methods without innovation
• **Duplication of existing products**: Reverse engineering or copying competitors
• **Surveys, studies, market research**: Business/market analysis not technological
• **Quality control/testing**: Routine testing of existing products
• **Management/administrative functions**: Planning, coordination, oversight
• **Internal-use software**: Software developed primarily for internal use faces additional hurdles
• **After-commercial production**: Activities after product reaches commercial production stage
• **Foreign research**: Research conducted outside the United States
• **Funded research**: Research funded by grants, customers, or other parties (some exceptions apply)
• **Social sciences, arts, humanities**: Research not rooted in hard sciences

Question 3

How does the scoring system work in this tool?

Accepted Answer

The tool uses a 0-100 scoring system for each of the four tests, with a 70% threshold for passing:

• **0-40**: Activity clearly does not meet test requirements
• **40-60**: Uncertain qualification, significant documentation gaps
• **60-70**: Borderline qualification, requires strengthening
• **70-85**: Likely qualifies with proper documentation
• **85-100**: Strong qualification with comprehensive evidence

**Overall qualification requires**:
• ALL four tests score ≥70 (no exceptions)
• Documentation quality ≥60% for medium risk
• Documentation quality ≥80% for low risk

The risk assessment combines test scores and documentation quality to determine audit risk exposure.

Question 4

What documentation do I need to prove qualification?

Accepted Answer

Strong contemporaneous documentation is critical for audit defense. The IRS emphasizes records created at the time of research, not after the fact:

**Essential documentation**:
• Project plans and technical specifications
• Design documents and architectural diagrams
• Test plans, protocols, and results
• Meeting minutes and progress reports
• Employee time records (contemporaneous tracking)
• Budget authorizations and expense receipts
• Correspondence showing technical uncertainty
• Records of alternatives evaluated
• Technical problem statements
• Hypothesis formation and testing documentation

**Documentation quality factors**:
• Contemporaneous (created during research)
• Specific (detailed, not generic)
• Technical (shows hard science basis)
• Comprehensive (covers all projects)
• Organized (easy to audit)
• Signed/dated (verifiable)

Documentation quality score represents the percentage of these requirements met.

Question 5

What is technical uncertainty and why does it matter?

Accepted Answer

Technical uncertainty is a cornerstone requirement for R&D credit qualification. It means the information you seek is not readily available and cannot be determined through routine analysis or known methods.

**Qualified technical uncertainty**:
• Capability of the business component is uncertain
• Appropriate design of the business component is uncertain
• Method of developing/improving the component is uncertain
• Requires expertise beyond what's reasonably available

**NOT technical uncertainty**:
• Cost or time uncertainty
• Business success or market acceptance uncertainty
• Merely difficult or time-consuming work
• Uncertainty resolved by reviewing existing knowledge
• Uncertainty about project management or resources

You must document:
• What was uncertain at the start
• Why existing information was inadequate
• How you systematically evaluated alternatives
• What you discovered through experimentation

Question 6

Can software development qualify for the R&D credit under this test?

Accepted Answer

Yes, but software development faces specific scrutiny and additional requirements:

**Software likely to qualify**:
• New algorithms or data structures with uncertain performance
• Novel architecture or design patterns
• Innovation beyond existing frameworks/libraries
• Significant technical challenges requiring experimentation
• Development of new techniques or methodologies

**Internal-use software hurdle**:
Software developed primarily for your company's internal use must meet a higher bar:
• Must be innovative and involve significant economic risk
• No commercially available software meets your requirements
• Must represent substantial improvement over existing systems

**Software unlikely to qualify**:
• Standard business applications using known methods
• Customization or configuration of existing software
• User interface design without technical innovation
• Integration of existing components without innovation
• Routine bug fixes or maintenance

Document systematic evaluation of technical alternatives and why known methods were inadequate.

Question 7

How does risk assessment work in the QRA qualifier?

Accepted Answer

Risk assessment predicts likelihood of IRS challenge based on qualification strength and documentation quality:

**Low Risk (audit-ready)**:
• Overall score ≥90%
• Documentation quality ≥80%
• All four tests strongly pass (≥85)
• Clear evidence of systematic experimentation
• Comprehensive contemporaneous documentation

**Medium Risk (borderline)**:
• Overall score 70-89%
• Documentation quality 60-79%
• Tests pass but not strongly (70-84)
• Some documentation gaps
• Uncertain technical uncertainty

**High Risk (vulnerable)**:
• Overall score <70%
• Documentation quality <60%
• Any test fails (<70)
• Weak process of experimentation
• Limited or reconstructed documentation

High-risk activities should not be claimed without significant improvement. Medium-risk activities benefit from strengthened documentation before claiming.

Question 8

What happens if my activity scores below 70 on any test?

Accepted Answer

**Failing any single test disqualifies the entire activity from R&D credit.**

If any test scores below 70, you have three options:

**1. Don't claim the credit** (safest option)
• Activities that fail any test are not qualified research
• Claiming disqualified activities risks penalties and interest
• Could trigger broader audit of other R&D claims

**2. Improve and re-evaluate** (if borderline 60-69)
• Gather additional documentation and evidence
• Refine project definition to focus on qualifying elements
• Separate qualifying research from non-qualifying activities
• Work with R&D tax specialist to strengthen case

**3. Restructure the project** (if fundamentally flawed)
• Some project elements may qualify while others don't
• Extract qualifying research activities from larger project
• Document technical uncertainty more explicitly
• Implement systematic experimentation methodology

The tool provides specific recommendations based on which tests failed and why. Address these issues before claiming credit to minimize audit risk.

QRA Qualifier Tool

QRA Qualification Test

Four-Part Test

Documentation Quality

Excluded Activities (IRC §41(d)(4))

Qualification Status

Risk Assessment

Test Results

Recommendations

📚 Additional Resources

How the QRA Qualifier Tool Works

Four-Part Test Evaluation

Documentation Quality Assessment

Risk Assessment Algorithm

Qualification Decision Tree

Frequently Asked Questions

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