Does AI Development Qualify for the R&D Tax Credit?

In Brief:

• AI work can qualify for the federal R&D tax credit under IRC Section 41. No separate AI credit exists, so companies must apply the existing four-part test: permitted purpose, technological in nature, technical uncertainty, and experimentation.
• Using an off-the-shelf AI tool is generally not R&D. The stronger case comes when a company faces technical uncertainty and systematically tests different approaches to build or improve an AI-enabled solution.
• Projects that use AI coding assistants may still qualify. If developers test, rework, and validate AI-generated code to resolve technical uncertainty, that work can count as qualified research.
• Eligible AI costs may include wages, computing resources, model training, and usage-based LLM access. Flat-fee AI subscriptions generally qualify only if the company can show how much usage went toward the research.
• Documentation should start now, before year-end. For tax years beginning after 2025, Section G of Form 6765 requires more detail on business components, so tracking projects and expenses as the work happens is essential.

Artificial intelligence is changing how businesses develop software, improve processes, test ideas, and solve technical problems. Some of that work may also qualify for the federal research and development tax credit under IRC Section 41. The credit can reduce a company’s federal tax liability and free up cash to reinvest in the business. Similar savings may also be available through state R&D tax credit programs. Companies investing in AI should review what work may qualify for credit and begin the documentation process prior to year-end. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.

How AI Innovation May Qualify for the R&D Tax Credit

There is no separate R&D tax credit for artificial intelligence. Companies must apply the existing Section 41 rules to AI-related work, whether they develop AI or use it as part of another project. Under Section 41, the credit applies only to domestic activities that meet the qualified research definition. Qualified research generally must meet a four-part test:

• Permitted purpose. The company is developing or improving a product, process, software, technique, or other business components.
• Technological in nature. The work connects to computer science, engineering, or another hard science.
• Technical uncertainty. The company is trying to determine whether, or how, it can develop or improve the business component.
• Experimentation. The company tests alternatives using a systematic process.

In practice, a company that purchases an AI tool and uses its standard features is likely not conducting R&D. However, when a company faces technical uncertainty and tests different approaches to develop or improve an AI-enabled solution, there is a stronger case for claiming the credit.

Common Qualifying Scenarios

AI-related work may meet the four-part test in many different ways. The following examples show two common scenarios.

One is building an AI tool. A construction company hired a developer to build a custom AI tool. The tool reads project drawings and cost data to flag budget risk early. Nobody knew at the outset which approach would work. So, the developer tested different methods against the company’s own data and adjusted based on the results. That uncertainty, and the testing it took to resolve it, is what makes the work qualify.

Another is using AI as part of a larger development effort. A manufacturer was building a new internal quality-tracking system and used an AI coding assistant to speed up parts of the work. The AI generated the first draft of the code. But the company’s developers still had to determine whether it worked, test it, and rework it until it solved the problem correctly. That work can also qualify because the team still directed the process and resolved the technical uncertainty, even though AI helped produce some of it.

What Costs May Be Eligible

Once a company identifies qualified research, it can determine which costs relate to that work. Qualified research expenses (QREs) may include:

• Employee wages for those who conduct qualified research or directly supervise or support that work.
• Supplies used or consumed during the research process, including computer and technology costs that meet the requirements for qualified research.
• Contract research expenses for certain domestic research performed by third parties.

For AI, eligible costs may include custom model training, coding assistants, computing resources, and AI agents. Access to large language models can also count, though metered, usage-based access is the stronger case. A flat-fee subscription generally only qualifies if the company can show how much of that usage went toward the research itself.

Businesses are encouraged to work with an advisor to determine whether an activity qualifies and which costs can be assigned to particular business components when making the claim.

The Importance of Documentation 

Companies should identify potential qualifying projects while the work is underway and connect related expenses to those projects as they happen. They should also document the technical questions the team was trying to answer and the experimentation used to reach a solution.

A centralized process can help since R&D projects often span multiple areas. Existing project plans, testing records, development notes, time records, invoices, and other business records may help support the claim. The goal is to create a clearly connect the activity, the expenses, and the qualified research.

Companies claim the federal credit on Form 6765. Reporting requirements are also becoming more detailed. For tax years beginning after 2025, Section G requires additional information about the business components included in the claim, subject to applicable exceptions. That makes it more important to identify qualifying research throughout the year instead of trying to recreate the details at tax-filing time.

State R&D Credits May Add to the Benefit

Many states offer some form of R&D tax incentive. Some follow the federal rules, and others have different requirements and calculations. Companies conducting qualified research should also consider whether any AI-related activities may generate state tax benefits.

We’re Here to Help

AI may change the way companies conduct research, but businesses do not have to wait for AI-specific tax rules to evaluate the R&D credit. Section 41 already explains how to determine what qualifies. Tax advisors can help with every step of the process, from identifying possible qualifying activities to calculating the credit and filing the claim. If you have questions about the information outlined above or need assistance with another R&D tax credit issue, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.