Many companies mistakenly claim requirements gathering and project management for software R&D tax credits. IRS audits and tax court rulings prove these activities don’t qualify.
The Common R&D Claiming Mistake in Software Development
Software development teams rely heavily on ticketing systems like Jira, Notion, and Linear to manage projects. Requirements gathering, ticket creation, and project management are core parts of the workflow.
It’s easy to assume this work qualifies for R&D tax credits or even capitalized labor reporting under GAAP and IFRS. After all, these activities feel connected to the software development process.
But here’s the reality: they don’t qualify.
Courts, Treasury regulations, and the IRS have made it clear—requirements and project management activities fail to meet the tests for R&D tax credit eligibility. Including them in claims is one of the most common errors companies make, and it’s drawing increased IRS audit scrutiny.
Legal Precedent Excluding Requirements and Project Management
In Moore v. Commissioner (T.C. Memo. 2023-20, aff’d 7th Cir. 2024), the Tax Court stated:
“Specifying and developing requirements for a product is not qualified research.”
The court disallowed R&D credits where requirements work was bundled with software development time.
Similarly, in Phoenix Design Group, Inc. v. Commissioner (T.C. Memo 2024-113), the court rejected requirements-gathering as qualified research, emphasizing that the work did not involve experimentation to resolve technical uncertainty.
Treasury Regulation §1.41-4(c)(10) explicitly excludes “management functions or techniques,” which covers project planning, scheduling, and administrative oversight. The IRS Software Audit Guidelines further flag project management and requirements gathering as “high-risk exclusions.”
Why Requirements Fail the R&D Tax Credit Test
The key issue is uncertainty:
- Requirements gathering and ticketing: The outcome is predetermined requirements will be documented, and tickets will be created. There’s no scientific or technical uncertainty in writing user stories.
- Software development: Building, testing, and deploying code involves genuine uncertainty. Developers must experiment with design, integrations, and technical solutions to achieve results.
The IRS clarifies:
“Requirements activities specify the features desired in the new software but tend not to address any software development uncertainties.”
This distinction is why development qualifies, but requirement-setting and project management don’t.
The IRS Four-Part Test for R&D Tax Credit Eligibility
To qualify for federal R&D tax credits, activities must meet all four IRS criteria:
- Permitted Purpose – The activity must create or improve a business component’s performance, functionality, reliability, or quality.
- Technological in Nature – The work must rely on computer science, engineering, or other hard sciences.
- Technical Uncertainty – At the outset, there must be uncertainty about capability, method, or design.
- Process of Experimentation – At least 80% of the activities must involve systematic experimentation, testing alternatives, refining, and retesting.
Requirements gathering and project management consistently fail the uncertainty and experimentation standards.
IRS Audit Risks for Over-Claiming R&D Credits
Including ticketing or requirements activities in R&D claims creates a high-risk audit position. If audited, the IRS may:
- Disallow claimed credits
- Demand repayment of prior-year credits
- Assess penalties and interest (often 20–40%)
For software companies, this can result in millions of dollars in back taxes and fines.
How CodeROI Automates Compliance and Reporting
At CodeROI, we help companies avoid these pitfalls by automating the separation of qualifying software R&D activities from excluded project management tasks. Our patented platform integrates directly with code repositories to generate audit-ready, defensible data for:
- R&D tax credits – Tracking only eligible development activities
- Tax deductions – Correctly allocating deductible work
- Capitalized labor (Cap Labor) reporting – Enforcing GAAP and IFRS standards by excluding preliminary requirement-setting
- Preventative compliance controls – Enforcing regulatory requirements in real time by requiring approvals, testing, and separation of responsibilities while continuously monitoring repository configurations to ensure compliance thresholds are never breached
The result: companies maximize tax savings and capital reporting accuracy while ensuring regulatory compliance is baked into the software development lifecycle.
Key Takeaway: Focus Claims on Development, Not Management
The line is clear: software development qualifies for R&D credits, project management does not.
If your company includes Jira, Notion, or Linear ticket creation, requirement documentation, or project planning in R&D claims, you’re likely over-claiming, and the IRS is cracking down.
Focus on the activities that involve genuine technical experimentation. That’s where the uncertainty, and the R&D tax credit eligibility, truly lives.
