Here are research activities that are specifically excluded from qualified research under I.R.C. § 41(d)(4):
I. Research after Commercial Production
Qualified research does not include any research performed after the beginning of commercial
Production, such as following activities:
- Preproduction planning for a finished business component;
- Tooling up for production;
- Trial production runs;
- Trouble shooting involving detecting faults in production equipment or processes;
- Accumulating data relating to production processes
- Debugging flaws in a business component
Any activity that relates to adapting an existing business component per customer’s requirement is also excluded.
For example, if a taxpayer owns rights to a software and grants licenses to customers, in this case, any expenditure incurred by the taxpayer in adapting the core software program to requirements of the customer represent activities excluded from definition of qualified research under 41(d)(4)(b).
This exclusion applies in instances where a taxpayer spends time analyzing the existing elements of their business components to develop potential alternative elements. For example, plans, blueprints, detailed specifications, and publicly accessible information of the business element.
However, Qualified Research Expenditures spent on researching solely an alternative product is not excluded
IV. Surveys, Studies, Research Relating to Management Functions
Qualified research does not include any management functions or techniques, including preparation of financial data and analysis. Also includes such items of the following activities:
- Efficiency surveys
- Development of employee training programs;
- Management organization plans;
- Management based changes and accumulating data in production processes;
- Market research, testing or development;
- Routine data collections or ordinary testing
V. Research in the Social Sciences, etc.
Qualified research does not include research in the social sciences such as economics, humanities, arts, behavioral science, or business management.