R&D Policy Navigator
The Humanities Exclusion
IRC Section 41(d)(4)(G) Explained
The "Humanities Exclusion" within the Research & Development (R&D) Tax Credit (IRC Section 41) creates a critical boundary between eligible technological innovation and ineligible scholarly research. Specifically, the IRS regulations disqualify any research in the social sciences, arts, or humanities. This exclusion underscores the legislative intent of the credit: to foster technological and scientific advancement in "hard sciences" (engineering, physics, biology, computer science) rather than soft sciences (economics, psychology, sociology).
For a claim to be valid, the uncertainty being eliminated must be technological in nature, not related to style, taste, or social behavior. For example, developing a new database architecture to handle big data is eligible; however, using that database to analyze consumer purchasing trends (Economics/Marketing) is strictly excluded. Understanding this distinction is vital for accurate tax filing, as conflating "scientific method" in social sciences with "technological nature" in hard sciences is a primary trigger for IRS audit adjustments.
Compliance Alert
Humanities/Social Science claims are frequently targeted during examination.
Core Regulation
§41(d)
Internal Revenue Code
The Discipline Matrix
Interact with the grid below to understand which academic and professional fields fall within the "Qualified" zone versus the "Excluded" zone based on IRS regulations.
Financial Impact of Misclassification
This chart illustrates the potential audit outcome when Social Sciences are improperly mixed with Technical Sciences in a Qualified Research Expense (QRE) calculation.
Notice how claims heavily reliant on "Soft Science" labor (Psychology, Market Research) often see significant reductions ("Sustained Amount") upon review, whereas "Hard Science" claims (Engineering, Software) are more robust.
💡 Strategy Tip
Isolate technical activities. Even if a project involves psychology, claim only the software engineering or physical product design hours.
Fig 1. Hypothetical Audit Sustainability Rates by Discipline
Interactive Scenario Simulator
Click a scenario card to reveal the IRS determination based on Section 41(d)(4)(G).
How to Further Clarify & Substantiate
To mitigate risk and ensure compliance when operating near the boundaries of Humanities and Science, consider these three steps:
Segregate Tasks
Don't treat a project as a monolith. Separate the hours spent on User Experience Research (Excluded) from User Interface Engineering (Qualified).
Define Technical Risk
Document the computer science or engineering challenges. Why was the code difficult to write? Not why the user behavior was hard to predict.
Consult Specialists
Engage tax counsel familiar with recent Tax Court rulings involving the exclusion to review narrative descriptions before filing.
The Mandate and Ambiguity of the Humanities Exclusion in IRC Section 41: Context, Compliance, and Required Regulatory Clarification
I. Executive Summary: The Exclusionary Mandate and Its Context
The Humanities Exclusion, formally codified under Internal Revenue Code (IRC) Section 41(d)(4)(E) and elaborated in Treasury Regulation § 1.41-4(c)(8), serves as a critical statutory limitation on the scope of the U.S. Research and Development (R&D) Tax Credit. The provision explicitly dictates that research in the social sciences (including economics, business management, and behavioral sciences), arts, or humanities does not constitute qualified research eligible for the credit.1 The core meaning of this exclusion is to legally confine the R&D incentive to activities centered exclusively on technological discovery—meaning research that relies on the principles of the hard sciences (physical or biological sciences, engineering, or computer science).3 This rule is indispensable for maintaining the integrity of the credit, as it reinforces the “Technological Nature” requirement of the mandatory four-part test, thereby preventing the subsidy of commercially beneficial but non-technological endeavors such as routine management studies, market research, financial modeling, or aesthetic improvements.4 The exclusion prevents taxpayers from claiming the credit for systematic inquiry that resolves non-technical uncertainties, such as those related to consumer preferences, organizational efficiency, or investment risk, which are intrinsic to the excluded disciplines.
The importance of the Humanities Exclusion is amplified by the complexities of modern, interdisciplinary innovation, particularly in software and digital systems where technological development heavily intersects with behavioral science. While the IRC Section 41 credit aims to incentivize investments in innovation leading to new or improved function, performance, reliability, or quality, the exclusion ensures that the process utilized must involve the resolution of technical uncertainty through a systematic process of experimentation based on hard science.3 Consequently, activities like User Experience (UX) design, which optimize product consumption based on principles of psychology or behavioral economics, generally fall under the exclusion unless the testing is fundamentally required to resolve a technical uncertainty inherent in the underlying computer science or system architecture.7 The regulatory framework demands that taxpayers undertake a meticulous burden of proof, rigorously segregating costs and documenting that all claimed Qualified Research Expenses (QREs) are directed toward overcoming technical unknowns, ensuring no claim rests on activities derived from the excluded fields.9
II. The Foundational Framework of Qualified Research
A. Purpose and Context of the R&D Tax Credit
The Research Credit, authorized by IRC Section 41, functions as a powerful tax incentive designed to spur domestic investment in innovation and technological advancement.11 This legislative intent focuses on stimulating activities that result in a new or improved business component, whether it be a product, process, technique, invention, formula, or software.5 To qualify for the credit, a taxpayer must generate Qualified Research Expenses (QREs), which primarily consist of employee wages for qualified services, the cost of supplies used, and contract research expenses.6 However, the scope of “qualified research” is tightly constrained by a set of criteria and explicit exclusions that collectively define the types of innovative activities the federal government seeks to subsidize.
B. The Four-Part Test: Defining Qualified Activities
The gateway to claiming the R&D credit involves satisfying the four cumulative requirements stipulated under IRC § 41(d)(1).13 The rigorous application of this test is essential because any activity failing even one part is immediately disqualified.
1. Permitted Purpose
The research must relate to a new or improved function, performance, reliability, or quality of the business component.3 This requirement immediately narrows the field, as research intended solely to develop or improve non-functional elements, such as style, taste, cosmetic appeal, or seasonal design factors, is explicitly disqualified.5 This pre-emptive exclusion establishes that commercial or aesthetic success alone cannot justify the credit; a demonstrable technical improvement is required.
2. Technical Uncertainty
A taxpayer must face technical uncertainty at the outset of the project concerning the capability, methodology, or appropriate design of the business component.3 This requirement ensures that the research effort is a genuine attempt to overcome technical barriers, rather than a routine application of known information or existing technology.14 Simply performing basic calculations on readily available data does not satisfy the requirement for investigative activity intended to discover information.14
3. Technological Nature
The research must be conducted for the purpose of discovering information that is technological in nature, relying on the fundamental principles of hard sciences, specifically the physical or biological sciences, engineering, or computer science.3 This criterion forms the direct theoretical basis for the Humanities Exclusion. If the information sought relies predominantly on social, cultural, or financial principles, it fails the technological nature test, irrespective of the commercial potential of the resulting business component.
4. Process of Experimentation
Qualified activities must include a systematic process of experimentation designed to attempt to resolve the identified technical uncertainties.3 This process must be evaluative and generally capable of evaluating more than one alternative design or methodology.6 This systematic effort must be directly linked to resolving the technical unknowns, ensuring that the expense is incurred for iterative testing and analysis of functional capabilities, not routine quality control or production troubleshooting.4
III. Statutory and Regulatory Definition of the Humanities Exclusion
The Humanities Exclusion is articulated under IRC § 41(d)(4)(E), operating as a specific carve-out from the general definition of qualified research. This provision acts as an absolute bar, preventing certain research fields from qualifying even if they otherwise demonstrate systematicity or resolve uncertainty that might be mistaken for technical resolution.
A. Explicit Categories of Exclusion
Treasury Regulation § 1.41-4(c)(8) and the corresponding IRS guidance detail the scope of the exclusion: “Qualified research does not include research in the social sciences (including economics, business management, and behavioral sciences), arts, or humanities“.1 This comprehensive list is designed to eliminate research activities related to human factors, market forces, and organizational structures, thereby maintaining the technological focus of the credit.
1. Social Sciences
The inclusion of social sciences addresses commercial and organizational research that often involves complex data analysis but is not rooted in hard science.
- Economics and Business Management: This covers activities such as the preparation of financial data and analysis, development of management organization plans, and management-based changes in production processes (like rearranging work stations on an assembly line).4 Efficiency surveys, routine data collection, and market research are also excluded, often falling under both the Humanities Exclusion and the separate exclusion for management functions.15
- Behavioral Sciences: This category encompasses disciplines such as psychology and behavioral economics. Research focused on how individuals absorb, process, and react to information, or on non-economic factors driving behavior (such as social norms or trust), is explicitly excluded.17 This is critical because sophisticated technological products often involve behavioral research to optimize user interaction, but if the research objective is purely psychological or preferential, it fails to qualify.8
2. Arts and Humanities
This exclusion targets non-technological creative or scholarly pursuits. Research aimed at advancing aesthetic values, historical understanding, or philosophical inquiry is disallowed. For instance, research into the life of an artist would be excluded under the humanities rule.15 However, the distinction lies in the methodology: the development of a new formulation of artist’s paint, which involves chemistry and materials science, is not excluded simply because the end result benefits the arts.15 The focus remains rigorously on the underlying principles of the research process, not the final product’s application.
B. Functional Role in the Statutory Scheme
The Humanities Exclusion reinforces the structure of the R&D credit by acting as a secondary filter, ensuring that activities potentially meeting certain organizational or systematic requirements are still barred if their foundation is non-technical. If a taxpayer conducts a highly organized, systematic study (Process of Experimentation) intended to improve the quality (Permitted Purpose) of a business component, the exclusion for social science prevents that activity from qualifying if the underlying uncertainty being resolved is one of consumer preference, pricing volatility, or organizational structure.13 The statutory design prioritizes technological advancement over managerial or commercial innovation.
The table below summarizes the Humanities Exclusion alongside its related exclusionary counterparts under IRC § 41(d)(4).
Table 1: Statutory Exclusions from Qualified Research (IRC § 41(d)(4))
| Exclusion Category | Statutory Basis | Primary Focus of Exclusion |
| Research after Commercial Production | IRC § 41(d)(4)(A) | Activities occurring after the product meets basic functional requirements (e.g., debugging, production data collection) |
| Adaptation of Existing Components | IRC § 41(d)(4)(B) | Customizing an existing component for a specific customer requirement or need |
| Duplication of Existing Components | IRC § 41(d)(4)(C) | Reproduction of an existing component from physical examination or publicly available information |
| Surveys, Studies, and Management Functions | IRC § 41(d)(4)(D) | Efficiency surveys, market research, routine data collection, or development of management organization plans |
| Research in Social Sciences, Arts, or Humanities | IRC § 41(d)(4)(E) | Research activities rooted in non-hard sciences (economics, behavioral science, aesthetics) |
IV. Application in Practice: The Regulatory Example
The Treasury Regulations provide explicit examples to illustrate the application of the exclusions. Example 10 is the seminal regulatory guidance demonstrating the mechanics of the social sciences exclusion.13
A. Treasury Regulation Example 10: Insurance Product Development
In Treasury Regulation § 1.41-4(c)(10), Example 10, the facts describe an insurance company, X, developing a new life insurance product.13 In the course of this development, X engages in research with respect to three key areas:
- The effect of pricing and tax consequences on demand for the product.
- The expected volatility of interest rates.
- The expected mortality rates (utilizing published data and prior insurance claims).13
The regulatory conclusion is unambiguous: X’s activities related to the new product are excluded from qualified research because they represent research in the social sciences (specifically including economics and business management).13
B. Analysis of the Insurance Product Example
This example demonstrates the critical dividing line between technological research and commercial research. Although developing a new financial product is undeniably innovative and requires complex modeling and data analysis, the uncertainty being resolved relates to economic factors (demand, pricing) and actuarial/business management factors (interest rate volatility, mortality rates).13 These activities are rooted in principles of economics and business management, which are specifically defined as excluded social sciences. This confirms that complex financial innovation, despite requiring significant intellectual capital and leading to a new business component, does not meet the “technological nature” test.
The importance of this example cannot be overstated: it establishes that systematic inquiry into commercial feasibility, market acceptance, or financial risk management—all central components of business success—are outside the scope of the credit when they rely on social science principles.20 The focus of the regulatory exclusion is placed on the process and the principles relied upon, not the novelty of the final business component.15
V. Analysis of Modern Ambiguity: Behavioral Science and Technological R&D
In the contemporary context, the Humanities Exclusion poses the greatest risk in highly integrated fields, specifically where behavioral science meets engineering, such as in software and complex systems design.
A. The Challenge of User Experience (UX) and Human Factors Engineering
Modern software companies routinely engage in User Experience (UX) and User Interface (UI) testing to refine their products.21 This research sits at the precarious intersection of computer science (a qualifying hard science) and behavioral science (an excluded social science).8
- Excluded Behavioral Research (Psychological Optimization): This applies when the research seeks to optimize the design based on aesthetic appeal, convenience, or psychological comfort, where the technical system is already capable of executing all design alternatives. Research focused on understanding how consumers prefer to interact with a product, such as determining the optimal placement or color of a button to maximize conversion rates, relies upon principles of psychology or marketing, and is therefore excluded.7 This is distinct from R&D because it focuses on human preference rather than resolving functional system limits.
- Qualifying Human Factors Engineering (Technical Necessity): Research may qualify if the study of human factors is intrinsically necessary to resolve an uncertainty related to the functional capacity or reliability of the underlying technical component. For example, in developing a novel real-time control system (e.g., for surgical robotics or high-speed data visualization), uncertainty may exist regarding the maximum latency or information density that the human operator can tolerate without compromising the system’s performance or reliability. Research aimed at defining the technical parameters (e.g., frame rate minimums, display bandwidth) necessary to ensure operational capability involves human testing but is fundamentally resolving a technical uncertainty rooted in engineering or computer science.10
The regulatory definition creates tension: while the credit incentivizes innovation, the narrow interpretation of “technological nature” limits eligibility in areas where human behavior is the constraint. A substantial portion of the value in digital product innovation stems from sophisticated applications of behavioral and psychological principles that enhance utility and drive adoption. The current regulatory structure, by broadly excluding behavioral sciences, inadvertently creates a policy barrier against subsidizing this specific, high-value layer of modern innovation.23
B. The Audit Burden on Segregation
In audit scenarios, the process, not the ultimate success, is paramount.15 The critical factor is documentation that ties research expenditures to the resolution of technical uncertainties via principles of hard science, thereby confirming that the excluded fields were not the basis of the claim.
The distinction between excluded behavioral science and qualifying technological research is illustrated by the activities a company must segregate:
Table 2: Defining the Humanities Exclusion (Regulatory Interpretation)
| Excluded Discipline | Regulatory Definition | Contrasting Qualified Example (Hard Science Focus) |
| Social Sciences (Economics) | Research related to pricing, tax consequences, or market demand for a product, focusing on human financial behavior. | Developing a mathematically novel algorithm for high-speed automated trading (Computer Science focus). |
| Social Sciences (Behavioral Sciences) | Optimization based on psychological response, user preference, or aesthetics (UX/UI design focused on human perception). | Human factors engineering necessary to resolve technical uncertainty in a novel physical or digital interface (e.g., required latency reduction to prevent visual input error). |
| Arts and Humanities | Research into cultural, historical, or philosophical subjects, or work related to aesthetic design factors. | Chemical engineering research into a new pigment formulation or material science research for improved structural integrity. |
VI. Compliance, Documentation, and Audit Risk Mitigation
For firms operating in fields close to the exclusion (e.g., software, fintech, marketing technology), robust documentation is the only path to a defensible claim.9 The increased scrutiny and detailed disclosure requirements formalized through updated forms and recent court decisions demand that taxpayers provide upfront substantiation of compliance with the four-part test, particularly against the exclusions.9
A. The Burden of Proof and Technical Documentation
The taxpayer must clearly establish that expenditures were incurred to resolve technical uncertainty and not to fulfill routine management functions, aesthetic improvements, or behavioral research.10 Merely presenting the eventual solution to a problem is insufficient; the taxpayer must show that investigative activities were undertaken specifically to discover information that eliminated the uncertainty.14
To successfully mitigate the risk posed by the Humanities Exclusion, detailed evidence must demonstrate:
- Technical Nexus: The activity’s purpose must be linked directly to a deficiency in functional capability or performance, traceable to principles of hard science (e.g., computer science limitations, material engineering limits).
- Exclusion of Non-Qualifying Costs: Employee time and supply costs associated with market research, efficiency surveys, cosmetic design, or purely psychological studies must be meticulously tracked and excluded from QREs.4
- The “Substantially All” Rule: If research activities meet the “substantially all” requirement—meaning 80% or more of the taxpayer’s research activities (measured on a cost or other consistently applied reasonable basis) constitute elements of a process of experimentation for a qualified purpose—the balance of research activities may qualify, provided they are not otherwise excluded under section 41(d)(4).15 This rule underscores the necessity of clearly carving out all activities that fall under the Humanities Exclusion, regardless of how minor their cost is compared to the overall project.
VII. Recommendations for Regulatory Clarification and Policy Next Steps
Given the ambiguities arising from technological convergence and the high complexity of the R&D credit provisions, administrative action is necessary to provide taxpayers with the certainty required to properly claim the credit and avoid unnecessary compliance risks.24
A. Modernized Guidance on Software and Human Factors Engineering
The most pressing need is to provide updated regulatory examples that address the specific friction point of behavioral science in software development.
- Issuance of Detailed Treasury Regulation Examples Specific to UX/UI and HCI: The Treasury Department and the Internal Revenue Service (IRS) should issue updated regulations or supplemental guidance that expands upon the existing examples in Treas. Reg. § 1.41-4(c)(10). These new examples must clearly differentiate between non-qualifying psychological or aesthetic research (e.g., studies on color theory or text placement to improve user adoption rates) and qualifying human factors engineering where the human interaction is the subject of technical uncertainty resolution (e.g., minimizing visual latency in a virtual reality system to comply with physiological limits on sensory processing necessary for system reliability).7
- Clarification on the Definition of “Behavioral Sciences” in an Audit Context: The IRS should revise its Audit Technique Guide (ATG) to provide explicit, objective standards for examiners to distinguish between “Applied Human Factors Engineering” and pure “Behavioral Sciences” research.15 This guidance should pivot the determination toward evidence showing that the research resolves a technical failure inherent in the system’s design (e.g., system stability, data processing speed, algorithmic efficiency) rather than a failure of human preference or organizational method.
B. Harmonization with Section 174 Capitalization Rules
Recent legislative changes regarding the mandatory capitalization of domestic Research and Experimental (R&E) expenditures under IRC Section 174 have created a new compliance imperative.25
- Explicit Exclusion of Section 41(d)(4) Activities from Section 174 R&E Definition: Treasury and the IRS must issue guidance confirming that activities explicitly excluded from qualified research under IRC § 41(d)(4)—including research in the social sciences, arts, or humanities—are not to be considered “research or experimental expenditures” subject to mandatory capitalization under Section 174. Without this explicit clarification, businesses face the possibility of a dual penalty: denial of the R&D credit under Section 41, and mandatory five-year amortization of those expenses under Section 174, rather than immediate deduction under Section 162.25 This harmonization is crucial for resolving uncertainty and reducing the administrative burden on taxpayers.
Table 3: Recommendations for Regulatory Clarity (Next Steps Summary)
| Area of Ambiguity | Recommended Administrative Action (Next Step) | Policy Goal |
| Behavioral Science in Software (UX/UI) | Issue new, detailed Treasury Regulation examples specific to Human-Computer Interaction (HCI) and UX/UI design. | Establish clear boundaries between aesthetic/preference optimization and technical uncertainty resolution. |
| Audit Consistency and Definitions | Publish an updated Audit Technique Guide (ATG) clarifying the distinction between Applied Human Factors Engineering and Behavioral Sciences. | Provide objective metrics for auditors to assess the “Technological Nature” requirement against modern scientific practice. |
| Compliance with Section 174 | Explicitly confirm that activities excluded under IRC § 41(d)(4)(E) are not R&E expenditures under Section 174. | Prevent dual compliance burdens and streamline the deduction of commercial or managerial research costs. |
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The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.
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