Claiming the R&D Tax Credit for Failed Projects

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Last Updated on 9/11/2026

By Jonathan Tucker, Principal, R&D Tax Credit

Most businesses associate the Research and Development (R&D) Tax Credit with breakthrough innovations and completed projects. If a product launches successfully or a process gets optimized, it seems obvious to include those efforts in an R&D claim, but what happens when your project fails?

Businesses can claim the R&D Tax Credit for failed projects. Under IRC Section 41 and Treasury Regulation §1.41-4, eligibility depends on the nature of the research activities rather than whether the project succeeded. Businesses have long been able to claim the R&D tax credit for qualifying research performed on failed or abandoned projects, and that remains true for tax years 2025 and 2026. Project success is not required; the activities must satisfy all applicable Section 41 requirements, including technical uncertainty and a process of experimentation, and must not fall within an exclusion.

Many businesses associate the Research and Development Tax Credit with successful projects, completed products, or launched innovations. However, a project does not need to succeed in order to support an R&D tax credit claim. under IRC Section 41.

Failed projects may still include qualifying research activities when the work was technical in nature, involved experimentation, and was intended to resolve uncertainty. In some cases, unsuccessful projects can contain some of the strongest examples of qualified research activity.

According to KBKG’s R&D experts, failed projects often preserve a clear record of the technical barriers, alternatives, and testing that shaped the development process. The failed result is not what qualifies the project; the documented research activity is.

Addressing Misconceptions

A common misconception is that research only qualifies when it results in a finished product, revenue-generating solution, or successful launch. This can lead companies to overlook development efforts that may support valuable R&D credits.

The IRS does not evaluate R&D eligibility based solely on whether a project succeeded. Instead, the IRS evaluates whether the work meets all four requirements: the expenditures must meet the applicable domestic research or experimental expenditure test; the research must be technological in nature; the information must be intended for use in developing or improving a business component; and substantially all of the activities must constitute a process of experimentation for a qualified purpose.

Understanding this distinction can help businesses identify a broader range of qualifying projects, including initiatives that were abandoned, delayed, redesigned, or ultimately unsuccessful.

Demonstrate Technical Uncertainty

One key factor in determining eligibility is whether technical uncertainty existed at the beginning of the project. Technical uncertainty may relate to whether the company could achieve the intended result, which method should be used, or what design would be appropriate., as described in Treasury Regulation §1.41-4(a)(5).

For example, an engineering team attempting to develop a material capable of withstanding extreme temperatures may face uncertainty about whether the desired performance is technically possible. Even if the final material is never successfully developed, the project may still involve qualifying research.

An unsuccessful result can be consistent with genuine technical uncertainty, but failure alone does not establish qualification. The company must still show the uncertainty it faced, the alternatives it considered, and the process used to evaluate those alternatives. If the information available at the beginning already established the capability, method, or appropriate design, the activity does not satisfy the uncertainty requirement. United States v. McFerrin, 570 F.3d 672 (5th Cir. 2009), also confirms that qualified research does not need to expand the common knowledge of an entire industry and that a systematic trial-and-error process can satisfy the experimentation requirement.

Documenting the Process of Experimentation

Another important requirement is showing that the company engaged in a systematic process of experimentation. This may include:

  • designing and testing prototypes
  • running simulations
  • evaluating alternative approaches
  • testing materials
  • reviewing code
  • performing iterative development

A product feature that never reaches the market or an internal tool that is abandoned during development may still qualify if the work was directed toward solving a technical problem through experimentation.

Treasury Regulation §1.41-4(d) requires taxpayers to retain records in sufficiently usable form and detail to substantiate the research credit. IRS examination guidance also emphasizes contemporaneous records that connect specific business components and research activities to the expenses included in the claim. To support the claim, businesses should preserve documentation such as:

  • design trials
  • testing notes
  • lab results
  • revision logs
  • internal emails
  • development tickets
  • meeting notes
  • other records that show the technical decision-making process

KBKG’s R&D team recommends documenting unsuccessful projects while the work is still fresh, then linking each business component to the employees, tests, decisions, and expenses included in the credit calculation.

Capturing Outcomes and Documenting Failure

The IRS wants to see that the failure of a project stemmed from technical limitations, not market factors or business decisions. This is why documenting why a project failed is also equally important.

For example, if a prototype didn’t perform within required tolerances, or if a software team couldn’t reduce latency below a critical threshold despite multiple development sprints, those are technical reasons for failure. However, canceling a project because of shifting budgets or customer interest wouldn’t qualify.

Including final test results, team debriefs, or performance benchmarks that weren’t met can create a clear picture as to why the technical solution didn’t work. This helps establish that R&D efforts occurred, even if they didn’t result in a finished product.

Conclusion

R&D tax credit eligibility is not defined by whether a project succeeds. It is based on the effort to solve technical problems through experimentation and development. Failed projects may involve extensive trial and error that can qualify under the R&D credit rules. described in IRC Section 41 and Treasury Regulation §1.41-4.

By identifying and documenting unsuccessful research efforts, businesses may be able to capture tax benefits that would otherwise be missed. Whether the work involves advanced materials, software development, product engineering, or new technologies, a project that does not reach the finish line may still contribute to an R&D credit claim. For additional background on the federal credit, see the IRS Research Credit resource.

KBKG’s team can help evaluate past failed projects, identify qualified research activities, and determine whether additional tax benefits may be available. Click here to request a free, no-obligation consultation.

Frequently Asked Questions

Do abandoned projects qualify for the R&D credit?

They may. If the abandoned project involved technical uncertainty and a process of experimentation under Treasury Regulation §1.41-4, some or all of the related activities may still qualify.

Useful records may include design trials, testing notes, lab results, revision logs, internal emails, development tickets, meeting notes, and project closeout materials that show the technical decision-making process.

Yes. Technical failure may support an R&D credit claim, while business reasons such as budget cuts, market shifts, or lack of demand generally do not support qualification on their own.