The Exclusion of Management Surveys from the Colorado R&D Tax Credit (C.R.S. § 39-30-105.5)

Management Surveys (Exclusion) refers to costs incurred for business activities focused on internal efficiency, organizational structure, market feasibility, or financial planning. These expenses are explicitly non-qualifying under both federal and Colorado R&D tax credit definitions, regardless of how they may improve a company’s operational success.

This report provides an expert analysis of the meaning and application of the Management Surveys (Exclusion) within the regulatory framework of the Colorado Enterprise Zone (EZ) Research and Development (R&D) Tax Credit. The Colorado Department of Revenue (CDOR) and the Office of Economic Development and International Trade (OEDIT) align their guidance closely with federal statute, specifically Internal Revenue Code (IRC) Section 41, which details a comprehensive list of activities that do not constitute Qualified Research Expenses (QREs). Understanding this specific exclusion is vital for businesses seeking to maximize the credit and minimize audit exposure at the state level.

I. Foundational Nexus: Colorado R&D Credit Structure and Federal Integration

The Colorado R&D Tax Credit is designed to spur innovation and investment in specific economically distressed regions designated as Enterprise Zones.1 For businesses to claim this valuable state incentive, they must meet rigorous geographical, computational, and qualitative requirements that tether the state benefit directly to federal tax law.

Colorado Statutory and Administrative Context

The state credit is administered under C.R.S. § 39-30-105.5.2 To qualify, a business must perform the research activities within an approved Enterprise Zone and must typically maintain its presence in that zone for a minimum of three years.1

The calculation of the credit utilizes an incremental method. The nonrefundable credit is equal to 3% of the amount by which the QREs in the current tax year exceed the taxpayer’s average QREs expended in the same EZ during the preceding two income tax years.1

Utilization of the credit is strictly limited. In any given tax year, a taxpayer may claim no more than 25% of the total credit earned, plus any applicable carryover amount.2 A key feature of the Colorado credit is the ability to carry forward any unused excess credit indefinitely, maximizing the long-term utility of the incentive.1 Compliance requires mandatory annual pre-certification with the local EZ Administrator, followed by submission of the CDOR form DR1366 and the EZ Tax Credit Certificates with the Colorado income tax return.1

The Definitional Link to IRC §41

The statutory definition of qualifying expenditures in Colorado is established through a direct reference to federal law. C.R.S. § 39-30-105.5 specifies that “expenditures in research and experimental activities” are those paid as expenses under the provisions of the federal “Internal Revenue Code of 1986,” as amended.3 This incorporation means that the criteria for Qualified Research Activities (QRAs) defined in IRC §41 must be satisfied for the expense to qualify for the Colorado credit.5

The four-part test requires the activity to seek to develop or improve a business component’s function, performance, reliability, or quality (Permitted Purpose).7 Furthermore, the activity must be intended to discover information that eliminates a technological uncertainty 4, be technological in nature (relying on engineering, physical, or computer sciences) 4, and constitute a process of experimentation capable of evaluating alternatives.7

The explicit confirmation of the “management surveys” exclusion by Colorado’s administrative bodies elevates this specific rule beyond a mere technical regulatory point in state review. When OEDIT and CDOR materials explicitly list “management surveys” as a non-qualifying expense 1, it provides state administrators and EZ Program managers with a clear, direct, and high-visibility ground for denying claims. This administrative clarity simplifies the review process, allowing the state to quickly challenge costs related to organizational restructuring or general business efficiency without needing to delve into complex federal process-of-experimentation audit techniques during the initial certification or subsequent state audit. Therefore, compliance relies as much on avoiding the state’s clear “red flags”—such as management surveys—as it does on satisfying the complex technological four-part test.

II. Defining the Exclusion: Scope of Management Surveys and Functions

The exclusion of management surveys and related studies is a direct implementation of IRC §41(d)(4)(D) 9, which is designed to differentiate core scientific and technological development from routine business or administrative improvements.

Statutory and Regulatory Authority: IRC §41(d)(4)

Federal regulations detail the specific types of excluded activities under the provision for “surveys, studies, research relating to management functions” 10:

1. Efficiency Surveys: These are non-qualifying activities focused on optimizing non-technical business processes, workflow, or resource utilization.10
2. Management Functions or Techniques: This is a broad exclusion covering core administrative and operational tasks. Examples include:

• Preparation of financial data and analysis.10
• Development of employee training programs and management organization plans.10
• Management-based changes in production processes, such as rearranging work stations on an assembly line simply for workflow optimization.10 These activities improve administration or logistics, not technology.

1. Market Research, Testing, or Development: Activities related to assessing commercial potential, consumer surveys, advertising, and promotions are explicitly excluded.9
2. Routine Data Collection: Gathering standard operational data that is not specifically integrated into a structured process of experimentation designed to resolve a technical uncertainty is not considered qualified research.9
3. Routine or Ordinary Testing/Inspections: Testing performed solely for quality control, verifying that a product conforms to existing specifications, is excluded. Only testing integrated into the iterative process of experimentation to resolve technical uncertainty qualifies.9

Explicit Colorado Administrative Exclusion

In addition to adopting the federal statutory definition, OEDIT guidance specifically highlights the exclusion of “management surveys” to ensure clarity for EZ participants.1 Other explicitly non-qualifying expenses confirmed by the state include costs related to land, depreciable equipment, and research funded by any government entity.1

The administrative guidance also confirms the Adaptation Exclusion, explicitly non-qualifying costs incurred “to adapt a product to a particular customer’s needs”.1 This activity often arises from a managerial decision to fulfill a contract, not from a fundamental scientific uncertainty that requires experimentation.10

The market research exclusion carries a particularly high risk because market research often dictates the goals of technical development, creating a potential zone of commingling. If technical personnel conduct initial testing to determine the technical feasibility of a new component (e.g., “Can we physically achieve this desired thermal resistance?”), that testing is qualifying R&D. However, if the activity shifts to performing consumer surveys or market studies to determine the aesthetic appeal, consumer demand, or optimal price point of the component, that portion falls directly under the Market Research and Management Exclusion.8 Consequently, companies claiming the Colorado credit must rigorously document and segregate costs to ensure time spent gathering market feedback (a management function) is separated from time spent on technical development (resolving technological uncertainty).

Table 1 summarizes the critical exclusions:

Table 1: Federal & State Exclusion Mandates for Management Functions

III. The Crucial Distinction: Technical Uncertainty vs. Managerial Decision-Making

The defining mandate of the R&D credit is that the expense must be incurred to resolve a technological uncertainty.4 The fundamental purpose of the Management Surveys exclusion is to eliminate expenditures that resolve purely business, financial, or administrative uncertainties, which fall outside the scope of scientific advancement.

Qualifying: Resolving Technical Uncertainty

Qualified research involves seeking new information that fundamentally relies on principles of physical sciences, engineering, or computer science to eliminate uncertainty regarding the capability, method, or appropriate design of a business component.7 For instance, a manufacturing firm’s dedicated hours spent prototyping a new adhesive process to meet a new structural specification, where existing methods failed, involves iterative experimentation to resolve a technological method uncertainty. Such time spent in the process of experimentation is qualifying.8

Non-Qualifying: Managerial Uncertainty

Costs associated with management surveys or functions address uncertainties that are administrative, organizational, or economic in nature.13

• Financial Feasibility: An analysis of whether a product can be delivered at a lower cost without changing the technological approach, or if the market demand justifies the investment, constitutes a management study.13
• Logistical Optimization: Time spent developing employee training programs, drafting management organization plans, or simply rearranging physical equipment to improve operational efficiency falls under the excluded category of management functions.10
• Resource Allocation: Uncertainty regarding staffing levels or timelines for project delivery is categorized as a management challenge, not a scientific or technological uncertainty requiring R&D experimentation.13

Wage Allocation for Dual-Role Employees

The management exclusion presents a heightened audit risk concerning employee wages, particularly those paid to executives or senior managers who split their time between technical oversight and corporate administration.5 The wages of employees must be allocated based on time spent either performing, directly supervising, or directly supporting qualified research.5

When an employee, such as a Chief Operating Officer (COO), conducts a wide range of management and research functions, as seen in relevant tax litigation (e.g., the Moore case), wages claimed for the credit are frequently disallowed if documentation fails to adequately separate the qualifying time. Time spent on management functions, such as organizational planning, budgeting, or efficiency reviews, must be segregated from time spent supervising the technical experimentation process itself.14

The failure to properly document and segregate time for dual-role employees carries a unique and magnified risk within the Colorado R&D credit context due to the benefit structure. Colorado allows the credit balance to be carried forward indefinitely, but limits annual usage to 25% of the total credit generated.2 If a company’s claim is audited and a substantial portion of QRE wages for dual-function employees is disallowed because it was improperly categorized as technical R&D rather than management time, the taxpayer loses the immediate benefit and compromises the basis for the entire future pool of indefinitely carried-forward credits. Protecting the integrity of the initial QRE calculation, particularly wage segregation, is therefore essential to preserving the multi-year value of the Colorado credit.

Table 2 highlights examples distinguishing the types of uncertainties:

Table 2: Comparison of Qualified Technical Uncertainty vs. Excluded Managerial Uncertainty

IV. Colorado Revenue Guidance and Compliance Directives

Compliance with the Colorado R&D credit requires formal steps with state and local Enterprise Zone authorities, where the exclusion rules are explicitly reinforced.

The Role of OEDIT and Local Administration

The Colorado Enterprise Zone program is overseen by OEDIT, with local EZ Administrators managing the certification process.1 Annual pre-certification is mandatory for taxpayers to be eligible to claim the credits.2 The application process, which involves submitting documentation on research activities, serves as an initial filter for ensuring that claimed activities are genuine research and experimental activities conducted within the EZ. The final certification documents, along with the CDOR form DR1366, must be submitted with the Colorado income tax return.1

Guidance on Exclusions in State Documents

OEDIT’s official guidance clearly lists excluded expenses, ensuring that taxpayers are aware of activities deemed non-qualifying at the state level. This guidance specifically names “management surveys”.1

This strong administrative clarity is rooted in statute. The definition of qualifying expenditures under C.R.S. § 39-30-105.5(3) references the federal IRC.3 By explicitly confirming the IRC exclusion categories in administrative documents, the state ensures robust compliance and provides a clear basis for auditors to challenge ineligible claims, particularly those involving organizational efficiency or general administrative costs.

V. Case Study: Applying the Management Survey Exclusion in a Manufacturing Context

To demonstrate the application of the exclusion, consider the example of an EZ-based company, TechNova, engaged in advanced robotics manufacturing.

Hypothetical Scenario: Manufacturing Process Improvement

TechNova initiates two major projects aimed at increasing productivity.

Activity A: Qualified Research (Technical Uncertainty)

• Objective: Develop proprietary software algorithms to dynamically adjust the robotic arm’s movement parameters in real-time, solving a persistent vibration issue that affects precision during high-speed production. The existing robotic control system is insufficient, creating a technological uncertainty about the best method to eliminate the vibration while maintaining speed.
• Research: TechNova engineers spend 1,500 hours testing novel control algorithms, modeling physical forces, and running experimental trials to resolve the physical limitations of the robotic system.
• Status: The engineering wages, supply costs for sensors used in testing, and computer rental costs for simulation models are Qualified Research Expenses (QREs). The activity satisfies the four-part test by resolving technological uncertainty related to the manufacturing process method.

Activity B: Excluded Management Function (Efficiency Survey)

• Objective: Optimize floor logistics by minimizing the movement of parts inventory and maximizing tool availability to reduce downtime by 10%.
• Action: TechNova managers and a third-party consultant spend 500 hours analyzing workflow patterns, conducting efficiency surveys, and redesigning the factory layout by rearranging work stations and inventory storage racks. This required internal meetings focused on scheduling, logistics, and vendor management.
• Status: The consultant fees and the wages of managers dedicated to this organizational task are specifically excluded as Efficiency Surveys and Management Functions or Techniques.10 These activities resolve operational and administrative uncertainty, not technological uncertainty. These costs are Non-Qualifying Expenses for the Colorado R&D credit.

Practical Allocation Example: The CEO’s Dual Role

If TechNova’s CEO spends time on both activities, precise allocation is essential. Time spent approving the budget for the new algorithm testing (Activity A) or reviewing technical results and setting technological objectives is generally qualifying. However, time spent reviewing the outcomes of the logistics efficiency study (Activity B), managing corporate finances and investor relations, or developing the company’s annual human resources plan constitutes excluded Management Functions.10 Accurate documentation, supported by time logs or project management records, must clearly separate the qualifying percentage of the CEO’s compensation from the non-qualifying portion to withstand CDOR scrutiny.

VI. Conclusion: Strategic Compliance and Audit Defense

The Colorado R&D Tax Credit, while lucrative with its 3% incremental rate and indefinite carryforward, demands strict adherence to federal exclusions, particularly the one regarding management surveys and related functions. For EZ businesses, strategic compliance is necessary to secure the credit’s long-term value.

Strategic Compliance: Defensive Documentation

Successful claimants must adopt a defensive documentation strategy that preemptively addresses the management exclusion.

1. Proof of Technical Uncertainty: Documentation must precisely articulate the specific technological uncertainties (capability, method, or design) that necessitate the research and experimentation, establishing that the activities are scientific in nature rather than merely routine or administrative.7
2. Detailed Activity Narratives: Project files must include detailed descriptions of the research activities performed, explicitly linking expenses to the process of experimentation and ensuring that excluded functions—such as efficiency surveys, market research, or quality control—are not claimed.15
3. Segregation of Dual-Role Wages: Companies must implement granular time-tracking or robust allocation methodologies for employees, particularly managers and executives, who perform both technical and management duties. This documentation must explicitly separate qualifying technical supervision and support from excluded management functions like budgeting, organizational planning, or human resource administration.14

The explicit inclusion of “management surveys” in Colorado’s official guidance signals that these categories represent high-risk areas for state audit adjustments. Taxpayers must recognize that the failure to properly segregate management expenses can compromise not only the current year’s claim but, critically, the future utilization of the indefinitely carried-forward credit pool, necessitating stringent internal controls and meticulous record-keeping during the mandatory pre-certification process.

R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/