TL;DR

When it comes to the R&D tax credit, companies often wonder: “Do prototypes and testing count?” or “What about failed projects?” The answer is yes. The IRS rewards the process of experimentation, not just successful outcomes. This means prototyping, testing, and even failed R&D efforts often qualify, provided they meet basic IRS criteria.

Why These Questions Come Up

Many businesses hesitate to claim the R&D tax credit because they assume:

• Only finished, successful projects qualify.
• Prototyping and trial runs are just “standard work.”
• Failed experiments don’t deliver value, so they don’t count.

These misconceptions cause companies to miss substantial credits that they’ve rightfully earned.

The IRS View: It’s About the Process, Not the Outcome

The IRS defines R&D as activities that:

1. Aim to improve the function, performance, reliability, or quality of a product or process.
2. Involve a process of experimentation to resolve technical uncertainty.
3. Rely on principles of engineering, science, or computer science.

Notice what’s not on the list: success. The credit applies if you tried to resolve uncertainty through testing, even if the solution didn’t work.

Do Prototypes Count for the R&D Tax Credit?

Yes. Prototyping is one of the most common qualifying activities.

Examples:

• A/V companies building mock-ups of sound or video systems before full installation.
• Boating firms creating test hulls or engine models to measure performance.
• Manufacturers building small-batch samples for durability testing.
• Software developers launching beta versions to test functionality.

Each prototype involves iteration, uncertainty, and testing. That’s the essence of R&D.

Does Testing Count for the R&D Tax Credit?

Yes. Testing is central to proving or disproving technical ideas.

Testing Activities That May Qualify:

• Stress tests on equipment, hulls, or materials.
• Performance trials for engines, electronics, or prototypes.
• Debugging software code or fixing integration issues.
• Experiments to reduce latency, improve reliability, or meet safety standards.

Testing doesn’t just confirm success, it documents the process of experimentation the IRS requires.

Does Failed R&D Qualify?

Yes. Failed projects often provide the strongest evidence of R&D because they clearly involve uncertainty and experimentation.

Why Failed R&D Still Counts:

• It shows the company pursued a solution without knowing the outcome.
• Each failed iteration is part of the experimentation process.
• The IRS rewards attempting to resolve uncertainty, not just achieving a breakthrough.

Examples of Failed R&D That Qualify:

• A marine company designs a hull that fails stability trials.
• An A/V firm prototypes a system that proves too costly or unreliable.
• A software team develops an integration that ultimately doesn’t scale.

Even if the end product never reaches market, the effort may qualify.

Common Misconceptions About Prototypes, Testing, and Failures

• “We didn’t commercialize it, so it doesn’t count.” → Wrong. Pre-commercial prototypes often qualify.
• “We stopped after a few trials.” → Still counts; the credit covers the process of experimentation.
• “It wasn’t groundbreaking.” → Incremental improvements often qualify.
• “It failed, so there’s no credit.” → Failure is part of R&D, and often strengthens eligibility.

The Financial Value of Including Prototypes and Failures

By properly including prototypes, testing, and failed projects, companies can:

• Dramatically increase the size of their R&D claim.
• Capture credits for work they previously ignored.
• Build stronger, more defensible claims by showing a complete experimentation record.

For some companies, including failed projects has doubled or tripled their eligible credit.

Documentation Tips

To claim prototypes, testing, or failed R&D securely:

• Keep design notes and test results, even if negative.
• Track time spent on prototyping or testing phases.
• Save materials invoices tied to prototypes.
• Document iterations (Version 1, Version 2, etc.) to show experimentation.

Even basic documentation like project logs, test data, or employee notes, helps substantiate a claim.

Risks of Ignoring Prototypes or Failures

• Leaving money unclaimed. Many firms underreport because they exclude prototypes or failures.
• Weakening your case. Excluding failed efforts can make your claim look incomplete.
• Giving competitors an advantage. Firms that claim fully free up more cash flow for growth.

Real-World Example

A manufacturer spent two years developing a new marine propulsion system. They built five prototypes; four failed, and one moved to production.

• If they only claimed the final successful prototype, their credit was worth ~$80,000.
• By including all five prototypes (failures included), their credit exceeded $250,000.‍

Failure added value.

Final Thoughts

So, do prototypes and testing count for the R&D tax credit? Yes.
Does failed R&D qualify? Absolutely.

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The credit isn’t about celebrating success, it’s about rewarding the effort to innovate, experiment, and solve technical problems. By including prototypes, testing, and even failed projects, companies can unlock the full financial benefit of their innovation.

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If your company has been excluding prototypes or failed projects from your R&D claims, you’re likely leaving money on the table.

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Contact B10 Capital today to review your activities. We’ll ensure every qualifying effort, successful or not, translates into secure, IRS-compliant savings.

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