What Recent Court Cases Are Teaching Us About the R&D Tax Credit

The Research and Development (R&D) Tax Credit remains one of the most valuable tax incentives available to innovative businesses. It rewards companies that invest in developing new products, improving processes, solving technical challenges, and advancing technology.

At the same time, recent court decisions have provided a clearer picture of what the courts and now the IRS expect when evaluating R&D credit claims. The common theme running through these cases is not whether companies were solving difficult problems. It is whether they can demonstrate how they solved them, who was involved in solving them, and whether they can prove they followed a true process of experimentation.

For many organizations, this distinction is important.

The question is no longer simply, “Did we innovate?” The question is, “Can we show how we innovated and who did the evaluative work?”

 

Innovation Alone Is Not Enough

Many companies assume that because they design new products, improve manufacturing processes, create software, or tackle engineering challenges, they automatically qualify for the R&D credit.

Recent court decisions suggest otherwise.

The courts continue to focus on whether a taxpayer can demonstrate a genuine process of experimentation. In several cases, judges acknowledged that technical challenges existed. The issue was that taxpayers could not sufficiently prove how alternatives were evaluated, how hypotheses were tested, or how decisions were reached.

The courts have repeatedly referenced the scientific method as a benchmark. That does not mean businesses need employees in lab coats or formal scientific research. It does mean there should be evidence that uncertainty existed, alternatives were considered, testing occurred, results were evaluated, and conclusions were reached based on those findings.  Repeating that process as needed until a successful design or product is achieved or abandoned because the technical hurdles couldn’t be overcome.

In other words, simply making a decision based on experience is not experimentation.

 

The Difference Between Expertise and Experimentation

One of the most significant themes emerging from recent cases is the distinction between professional judgment and experimentation.

Experienced engineers, developers, designers, and technical professionals solve problems every day. They often rely on years of expertise to make decisions quickly and effectively.

The courts have indicated that this alone may not satisfy the requirements for the R&D credit.

In the Phoenix Design Group case, engineers encountered multiple design challenges and selected solutions based on their experience and judgment. The court found that making design choices was not the same thing as conducting experimentation. The taxpayer struggled to demonstrate a structured process of testing alternatives and evaluating results.

For businesses, this is an important distinction.

If a team identifies a challenge, evaluates several possible approaches, tests them, analyzes the results, and refines the design based on those findings, there may be a strong case for qualifying research activities.

If a team simply relies on experience to choose the best option and moves forward, the credit very likely will be disallowed upon exam.

 

Failure Is Often a Good Sign

Interestingly, several court decisions highlight something many companies overlook.

Failed attempts can be some of the strongest evidence that experimentation occurred.

The Moore case involved the development of electronic display products. Testimony showed that numerous prototypes were built and rejected before a final design was accepted. Different configurations were evaluated, tested, and refined. The court described the process as iterative and involving multiple designs, experiments, and failures.

Many business leaders hesitate to discuss failed attempts because they view them as inefficiencies or mistakes.

From an R&D credit perspective, failed attempts can be powerful evidence that uncertainty existed and that a genuine process of experimentation occurred.

The fact that a company did not know the answer at the beginning of a project often strengthens the argument that qualifying research activities took place.

 

Documentation Continues to Be the Biggest Challenge

Perhaps the most important lesson from recent cases is that documentation frequently determines the outcome.

Several taxpayers lost not because innovation was absent, but because evidence was insufficient.

In case after case, courts pointed to documentation that lacked detail. Time records were too broad. Activities were not tied to specific technical challenges or experimentation. Testing activities were not adequately documented. Records failed to identify who performed key work or what investigative activities occurred.

One court noted that design drawings alone were not enough to demonstrate experimentation. Another observed that generalized descriptions of uncertainty and broad estimates of employee time did not provide sufficient support for the credit.

These decisions reinforce an important reality.

The IRS and the courts generally cannot infer experimentation simply because a project was complex. They expect taxpayers to provide evidence showing what happened during the development process.

 

What Good Documentation Looks Like

Many companies assume documenting R&D activities requires a complex system or extensive paperwork.

In reality, the most effective documentation often comes from normal business records that are maintained consistently.

Examples may include:

• Project plans and technical specifications
• Design iterations and revisions
• Meeting notes documenting technical discussions
• Testing records and results
• Engineering analyses
• Development logs
• Prototype evaluations
• Project management software records
• Time tracking connected to specific activities

The goal is not to create documentation solely for tax purposes.

The goal is to preserve evidence that already exists within the development process and connect it to the technical challenges being addressed.

Organizations that wait until tax return preparation to reconstruct activities often face a much more difficult task.

 

The Importance of Telling the Full Story

One recurring issue in recent litigation is that taxpayers often documented the problem and the final solution but failed to document what happened in between.

That middle section – the journey not merely the destination – is where the R&D credit frequently lives.

The courts want to understand how uncertainty was addressed. What alternatives were considered? What testing occurred? What failed? What was learned? Why was one solution selected over another?

Without that narrative, even technically sophisticated projects can be difficult to defend.

Business leaders often assume the complexity of a project speaks for itself.

Unfortunately, courts have consistently shown that complexity alone is not enough.

The process to resolve that uncertainty matters.

 

What Companies Should Do Now

Recent court decisions should not discourage companies from pursuing the R&D credit.

Instead, they provide a roadmap for strengthening future claims.

Organizations that regularly engage in product development, software development, process improvement, manufacturing innovation, engineering design, or technical problem solving should consider reviewing their current documentation practices.

Some useful questions include:

• Are technical uncertainties clearly identified?
• Are alternative approaches documented?
• Is testing recorded as it occurs?
• Can we explain how decisions were reached?
• Can we identify which employees performed key activities?
• Do time records connect employees to specific projects and technical work?
• Can we demonstrate an iterative development process?

Businesses that can confidently answer these questions are generally in a stronger position to support their R&D credit claims.

 

Looking Ahead

The R&D tax credit remains an important incentive for companies investing in innovation. The recent court cases do not signal a change in the law. Instead, they provide additional clarity regarding the evidence needed to support a claim.

The strongest claims are typically supported by more than technical success. They are supported by a clear story that shows uncertainty, experimentation, testing, evaluation, and documentation throughout the development process.

Companies that build these habits into their everyday operations are often better positioned not only for tax compliance but also for project management, knowledge retention, and operational improvement.

Innovation continues to create opportunity. The key is making sure the process behind that innovation is documented well enough to tell the full story when questions arise.

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