One of the most common misconceptions about the R&D credit is that you need to succeed. That is not true. R&D credit failed projects qualify under IRS rules if you went through a process of experimentation.
Failed projects count. Here is how.
The Legal Standard
Under Treasury Regulation § 1.41-4(a)(2), research is eligible for the credit “whether or not the research is successful.”
The regulation specifically states that a process of experimentation is the standard for substantiating qualified research. It does not require a commercially successful product or process.
The Treasury Regulation explicitly states that R&D credit failed projects qualify whether the research is successful or abandoned.
If you can show a systematic process of testing alternatives, the failure itself proves the experimentation.
What Is a “Process of Experimentation”?
The IRS defines the process of experimentation as:
“The process of evaluating one or more alternatives to achieve a result where the capability or method of achieving that result is uncertain at the outset.”
This involves:
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Modeling
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Simulation
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Systematic trial and error
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Prototyping
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Testing multiple alternatives
The failure is evidence of the uncertainty. If you already knew it would fail, it would not be research. The fact that you tested and it did not work is proof that you were resolving technical uncertainty.
Real Examples of R&D Credit Failed Projects That Qualify
Example 1: A manufacturer tries to reduce defect rates
A manufacturer develops a new fixture to reduce defect rates on a production line. After testing three different designs, none of them work. The company abandons the project.
The labor, materials, and testing costs for all three failed designs qualify.
Example 2: A craft brewery experiments with new hops
A brewery tests 40 different hop combinations to achieve a specific flavor profile. Only two work. The brewery files for the credit on all 40 batches, including the 38 that failed.
The failed batches qualify because they were part of the experimentation process.
Example 3: A software company tests new algorithms
A software company builds and tests five different algorithms to improve processing speed. Only one meets the target. The time spent on the four failed algorithms qualifies.
What does not qualify: Routine debugging or routine maintenance. The distinction is whether you were resolving technical uncertainty or just fixing known issues.
What the Court Said About R&D Credit Failed Projects
In Union Carbide Corp. v. Commissioner, the Tax Court made clear that the credit is available for research that is “not undertaken with a reasonable expectation of success.” The court emphasized that the uncertainty requirement is satisfied if the taxpayer is trying to eliminate uncertainty about the capability or method of achieving a result.
More recently, the IRS has reaffirmed that the process of experimentation is the core test—not the outcome.
If you’re not sure, the activity likely qualifies. Uncertainty is the trigger for the credit, not a barrier.
Documentation Requirements for R&D Credit Failed Projects
R&D credit failed projects require the same documentation as successful ones—contemporaneous records showing what you tested and why.
The IRS may ask: “What did you actually do?” Without records, the failure could look like a waste of time rather than a legitimate research effort.
Documentation should include:
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What you were trying to achieve
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The technical uncertainty you faced
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The alternatives you tested
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Why each alternative failed
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How much time and money you spent
Internal emails, lab notebooks, test results, time logs, and project files all count.
Why This Matters
The average R&D credit for small and medium businesses exceeds 75 thousand annually. If you are only claiming successful projects, you are leaving money on the table.
The IRS explicitly rewards experimentation—not just outcomes. Failed projects prove you were in the lab, on the factory floor, or in the field trying to solve something.
If you abandoned a project because it did not work, you probably just lost a credit you were entitled to.
Bottom Line
The R&D tax credit is not a reward for success. It is a reward for trying.
If you can show a systematic process of testing alternatives to resolve technical uncertainty, the failure is evidence of the research itself.
Call (844) 463-2400 or email hello@indagotax.com to find out which failed projects qualify.