There is no single definition that answers every U.S. tax question. The treatment depends on the tax year, where the work was performed, and whether you mean how research costs are treated or whether activities may qualify for the separate Section 41 research credit. The former Section 174 rules focused on investigating uncertainty; the current credit has its own four-part test.
What did “research or experimental” mean under the former Section 174 rules?
In its summary of the former regulation, IRS Notice 2023-63 describes research or experimental expenditures as business-connected research and development costs in the experimental or laboratory sense. The activity generally had to be intended to discover information that would eliminate uncertainty about developing or improving a product. In practical terms, there had to be a genuine development uncertainty to investigate; calling ordinary work “R&D” does not establish that it meets the definition.
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The historical definition of “product” was broad. It included a pilot model, process, formula, invention, technique, patent, or similar property, whether held for sale, lease, or license, or used in the taxpayer’s own business. Thus, the definition could reach development of an internal process or tool, not just an item sold to customers.
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Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Repair Windows errors before they cause bigger problemsFix Now →Scan for outdated or missing drivers - takes under a minuteDriver Scan →This uncertainty-based definition helps explain historical Section 174 treatment. It is not, by itself, a complete statement of current domestic expenditure treatment or the test for claiming a Section 41 credit.
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How does the tax year change the treatment of research costs?
For expenditure treatment, identify when the taxpayer’s tax year began and where the research was performed. The rules differ between the TCJA period and tax years beginning after 2024.
| Tax year and location | General federal treatment described by the IRS |
|---|---|
| Tax years beginning after December 31, 2021, and before January 1, 2025 — domestic research | Section 174 generally required capitalization and ratable amortization over five years, beginning at the midpoint of the taxable year. Source: IRS, Internal Revenue Bulletin 2026-39. |
| Tax years beginning after December 31, 2021, and before January 1, 2025 — foreign research | Section 174 generally required capitalization and ratable amortization over 15 years, beginning at the midpoint of the taxable year. Source: IRS, Internal Revenue Bulletin 2026-39. |
| Tax years beginning after December 31, 2024 — domestic research | Section 174A generally allows a deduction for domestic research or experimental expenditures. The IRS also describes an alternative capitalization and amortization method; applicable procedures depend on the taxpayer and tax year. Sources: IRS, Internal Revenue Bulletin 2025-38, including Revenue Procedure 2025-28; Internal Revenue Bulletin 2026-39. |
| Tax years beginning after December 31, 2024 — foreign research | Section 174 continues to require capitalization and ratable amortization over 15 years, beginning at the midpoint of the taxable year. Source: IRS, Internal Revenue Bulletin 2026-39. |
These are general statutory treatments, not a conclusion that every cost labeled research or development falls within the relevant provisions. Whether a particular cost qualifies depends on its facts and the applicable Code rules. The transition procedures and any accounting-method choice also depend on the taxpayer’s circumstances and filing history.
What is the separate Section 41 research-credit test?
The Section 41 credit uses a four-part qualified-research test, described in the IRS Instructions for Form 6765 (revised December 2025). The test is applied separately to each business component—not simply to a company’s overall R&D program.
1. The expenditure must meet the specified domestic-research condition
The instructions require expenditures to be treated as domestic research or experimental expenditures under Section 174A. This is one reason the credit analysis should not be substituted for the expenditure-treatment analysis.
2. The research must be technological in nature
The activity must be undertaken to discover information that is technological in nature.
3. The intended use must be a new or improved business component
The discovered information must be intended to be useful in developing a new or improved business component. The IRS defines a business component to include a product, process, computer software, technique, formula, or invention held for sale, lease, or license, or used in the taxpayer’s trade or business.
4. Substantially all activities must involve a process of experimentation
Substantially all of the activities must be elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality. Evidence of a real experimental process matters; a development label alone does not establish this condition.
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The Form 6765 instructions also list exclusions, including research conducted after commercial production begins. Do not assume routine quality control, ordinary adaptation, work after commercial production, or every software change qualifies. The instructions and underlying law contain further rules and exclusions.
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For expenditure classification, the IRS says amounts paid or incurred in connection with software development are treated as research or experimental expenditures under the relevant Section 174 and 174A rules. Notice 2023-63 discusses this statutory treatment for relevant tax years beginning after December 31, 2021; the IRS’s Section 174A guidance also addresses software-development amounts.
That treatment does not automatically establish eligibility for a Section 41 credit. Credit eligibility still requires the applicable business component to satisfy the four-part test and not fall within an exclusion.
How should you assess a particular project?
- Identify the tax year. Use the beginning date of the taxpayer’s year to determine which expenditure-treatment rules apply.
- Locate the research. Separate domestic work from foreign work; current foreign research remains subject to Section 174’s 15-year amortization rule.
- Clarify the tax question. Decide whether you are classifying costs under Section 174 or 174A, evaluating a Section 41 credit, or both.
- Define the project or business component. For credit purposes, analyze each component separately, rather than treating the entire product program as one undivided project.
- Review the evidence and exclusions. For the historical expenditure definition, identify the uncertainty the work aimed to resolve. For the credit, assess technological nature, intended use, experimentation, and applicable exclusions. Retain project records that support the facts being evaluated.
- Check filing and transition facts. A taxpayer-specific conclusion may depend on entity and filing details, prior accounting methods or elections, and the applicable transition procedure.
The IRS materials establish general rules, but they cannot determine an unidentified taxpayer’s treatment. A project-level analysis needs the taxpayer’s records and circumstances; consult a qualified tax professional for advice about a return, credit claim, or accounting-method procedure.
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