The Exclusion of Surveys or Studies in Idaho R&D Tax Credit Compliance: A Technical Analysis

I. Executive Summary: The Exclusion Defined and Contextualized

1.1. Defining the Exclusion: The Two-Line Mandate

The “Surveys or Studies” exclusion dictates that costs related to market analysis, efficiency reviews, consumer feedback, or general information gathering do not qualify for the Idaho R&D Tax Credit. This provision ensures the credit is strictly limited to expenditures incurred while performing technical investigation aimed at resolving defined technological uncertainties.

1.2. Strategic Importance for Idaho Businesses

The Idaho Credit for Research Activities, enacted under Idaho Code §63-3029G, provides a significant financial incentive for businesses engaging in innovation within the state.1 The credit is calculated as 5% of the qualified research expenditures (QREs) that exceed a predetermined base amount.2 Understanding and correctly applying the statutory exclusions, particularly the exclusion for surveys or studies, is fundamental to maximizing this benefit and maintaining compliance.

The value of the Idaho R&D credit extends far beyond the current taxable year. The non-refundable credit may be carried forward for up to 14 years to offset future Idaho income tax liabilities.3 This lengthy carryforward period means that any compliance error related to misclassifying excluded costs in the current period creates a compounding tax vulnerability that can affect returns for over a decade. The rigor required for documentation and cost segregation must, therefore, be exceptionally high to mitigate this long-term audit exposure.

The state government encourages high-value technological investment, often evidenced by other related incentives such as the Tax Reimbursement Incentive (TRI) program, which targets substantial economic development projects in technology and manufacturing.5 Accurate application of the surveys or studies exclusion reinforces Idaho’s commitment to funding genuine, risky technological advancement—the core mission of the credit—rather than subsidizing routine or non-technical general business development.

II. The Regulatory Nexus: Idaho’s Adoption of Federal Exclusions

2.1. Idaho Code §63-3029G: The Research Activities Credit Framework

Idaho establishes its research credit framework parallel to the federal structure. The credit is available to businesses that conduct qualified research within Idaho.1 Qualified Research Expenses (QREs) are generally defined as the sum of in-house research expenses and 65% of contract research expenses.6 In-house expenses include wages paid for qualified services, the cost of supplies used in the conduct of qualified research, and amounts paid for the right to use computers in conducting research.6

2.2. Idaho State Tax Commission Guidance: IDAPA 35.01.01.720

The critical factor governing the application of the surveys or studies exclusion lies in the explicit administrative guidance issued by the Idaho State Tax Commission (ISTC). IDAPA 35.01.01.720.01, titled “Credit for Idaho Research Activities: In General,” dictates a policy of near-total conformity with federal law for defining qualifying activities:

“The Idaho credit is computed using the same definitions of qualified research expenses, qualified research, basic research payments, and basic research as are found in Section 41, Internal Revenue Code, except only the amounts related to research conducted in Idaho qualify for the Idaho credit. If an expense does not qualify for the federal credit under Section 41, Internal Revenue Code, it will not qualify for purposes of the Idaho credit”.8

This core conformity rule carries significant implications for Idaho taxpayers. Because the ISTC relies entirely on federal definitions, Idaho tax professionals must be proficient in the intricacies of federal R&D tax law, including Treasury Regulations, revenue rulings, and the detailed guidance provided in IRS Audit Techniques Guides (ATGs).9 The ISTC does not need to issue separate administrative rules defining “Surveys or Studies” because the federal interpretation is automatically adopted. Consequently, the taxpayer’s burden is increased, requiring the maintenance of documentation that meets the higher standard of federal audit scrutiny, even when primarily claiming the state credit.

2.3. Statutory Exclusions Under IRC §41(d)(4) (Adopted by Idaho)

The exclusion for “Surveys or Studies” is one component of a broader set of exclusions codified in federal law (and thereby adopted by Idaho) that narrow the scope of activities eligible for the credit.11 The intention of these limitations is to prevent the research credit from becoming a general business subsidy.

The specific activities generally excluded from the definition of qualified research include:

• Any research conducted after the beginning of commercial production.12
• Research adapting an existing product or process to a particular customer’s need.12
• Duplication of an existing product or process.12
• Surveys or studies.11
• Research related to certain internal-use computer software (though exceptions exist).11
• Research in the social sciences, arts, or humanities.11
• Research conducted outside the United States or its territories (or outside Idaho, specifically for the state credit).3
• Research relating to management functions or techniques, market research, routine data collections, or routine testing or inspections for quality control.9

III. Deconstructing the “Surveys or Studies” Exclusion

3.1. Legislative Intent and Context

The legislative intent behind excluding “surveys or studies” is rooted in the statutory requirement that qualified research must constitute a systematic process of experimentation designed to eliminate uncertainty regarding the development or improvement of a business component. The credit is designed to reward the technological risk inherent in developing new or improved products or processes, not the general, often administrative or commercial, risk associated with gathering existing information.

3.2. Exclusion Category: Market Research, Testing, and Development

This exclusion captures expenses related to understanding the commercial environment, consumer preferences, or market viability, rather than focusing on technical feasibility. Activities such as determining optimal pricing strategies, running A/B tests on promotional interfaces, or collecting information about consumer demand for certain product features are strictly excluded.10 These activities represent the development of marketing strategy, not the advancement of technology.

While market data might be used by engineers to define the desired performance parameters for a new technological component (i.e., defining the technical uncertainty), the cost incurred to generate that market data remains non-qualified. For example, surveying potential customers about desired battery life in a new device provides input for the R&D team, but the cost of the survey itself cannot be claimed.

3.3. Exclusion Category: Management Functions and Efficiency Surveys

Activities centered on improving internal business operations, organizational structure, or financial performance are specifically carved out from qualified research. Excluded expenses include those related to efficiency surveys; management functions or techniques; the preparation of financial data and analysis; the development of employee training programs; and management organization plans.9

For instance, if a manufacturing company hires consultants to reorganize its assembly line floor plan (a change in production processes based on management analysis) to achieve better throughput, the associated costs are excluded.9 This exclusion holds even if the result is a significant cost reduction or improved output, because the method employed—a management study—does not meet the test of technological experimentation required under Section 41. The improvement must stem from applied hard science or engineering to qualify.

3.4. Exclusion Category: Routine Data Collection and Quality Control

The boundary between qualified technical data collection and excluded routine data collection or quality control is often the most challenging area for compliance. Excluded activities include “Routine data collections” and “Routine or ordinary testing or inspections for quality control”.10

This exclusion is inextricably linked to the ‘Research conducted after the beginning of commercial production’ exclusion.12 Before a product or process is commercially ready, technical testing and data gathering are often essential components of the process of experimentation aimed at resolving unknown technical characteristics. Once the product or process achieves a basic level of functionality and is introduced to the market, subsequent testing shifts in nature. Ongoing standard maintenance logging, regulatory testing, or checking every $N^{th}$ production unit for quality conformance are considered routine and are therefore excluded.10 The determination of whether a study or data collection qualifies hinges entirely on whether the activity is undertaken to resolve a specific, defined technological uncertainty that remains unresolved, or whether it is performed simply to maintain standards or track ongoing performance.

Table 2 clarifies the major exclusions adopted by the ISTC via federal conformity:

Table 2: Key Exclusions from Qualified Research Activities (IRC §41 Adopted by IDAPA 35.01.01.720)

IV. Practical Application: Distinguishing Technical Studies from Excluded Surveys

4.1. The Precondition: Meeting the Federal Four-Part Test

For any activity, including data collection or technical trials (which may appear similar to “studies”), to avoid the statutory exclusions and qualify for the Idaho credit, it must first satisfy the fundamental four-part test for qualified research:

1. The expense must be treated as permitted research or experimental expenditure under IRC §174.
2. The activity must be undertaken for the purpose of discovering information which is technological in nature.12
3. The application of technological information must be intended to be useful in the development of a new or improved business component.12
4. Substantially all the activities must constitute elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality.12

If an activity fails to meet this four-part test, it is automatically excluded, irrespective of whether it falls under the specific “surveys or studies” category.

4.2. The Critical Distinction: Uncertainty Resolution vs. Information Gathering

The primary differentiator between a qualifying technical data collection effort (a “study” in the non-technical sense) and a non-qualifying survey or study lies in the intent and outcome. Data gathered during modeling, simulation, or physical testing that is aimed at overcoming a specific technological challenge—such as investigating material failure, resolving performance latency in a system, or solving complex integration issues—is considered integral to the process of experimentation and qualifies.

Conversely, data collected primarily for general knowledge, administrative use, or consumer sentiment does not qualify. This includes surveys of existing technical literature or general industry data used purely for background knowledge, unless that data is directly and immediately integrated into a systematic process of experimentation designed to resolve the stated technical uncertainty.

4.3. The Role of Documentation in Defense

Given the ISTC’s reliance on federal definitions 8, Idaho taxpayers must be prepared to defend their QREs using documentation that meets federal standards. Documentation must clearly and contemporaneously articulate the specific technological uncertainty being addressed by the research and demonstrate how the data collected (the “study”) contributed directly to the resolution of that uncertainty.

Crucially, payroll costs must be segregated. Records must distinguish between time spent by employees on qualifying R&D activities (e.g., technical planning, systematic testing) and time spent on excluded activities, such as general management functions, marketing analysis, financial planning, or administrative tasks.6

4.4. Key Areas of Audit Risk

The blending of excluded activities with qualified research is a common area of audit contention, particularly in modern innovative industries:

• Software Development: Software projects frequently mix technical performance optimization (qualified, such as latency reduction or integration of new/legacy systems) with User Experience (UX) testing or interface preference assessment (excluded as market research or surveys).13 Taxpayers must rigorously segregate the costs associated with optimizing the technical engine from the costs associated with measuring user satisfaction or feature preference.
• Process Improvement in Manufacturing: Companies must be vigilant in separating engineering experimentation aimed at developing new functionality or improving technical processes from internal efficiency surveys designed solely to streamline workflow or administration.9

Table 1 provides a definitive guide for differentiating between qualifying and non-qualifying data collection activities:

Table 1: Differentiation Between Excluded Studies and Qualifying Technical Data Collection

V. State Revenue Office Guidance and Compliance Requirements

5.1. ISTC Administrative Posture: Leveraging Federal Precedent

The ISTC’s administrative posture, codified in IDAPA 35.01.01.720 8, requires Idaho taxpayers to conform to the complexities of federal R&D tax law. Because the state’s definitions mirror IRC §41, the standard for audit defense relating to the surveys or studies exclusion is effectively the federal standard. Taxpayers should anticipate that Idaho audits will utilize the same lines of inquiry and documentary requirements regarding the exclusion of market research, management studies, and routine testing as outlined in IRS guidance.9

This mandated uniformity means that Idaho taxpayers cannot afford to treat the state credit as a simplified compliance exercise. The need for strict internal cost segregation and robust contemporaneous documentation is essential to withstand scrutiny. Failure to demonstrate that an activity was intended to resolve technological uncertainty, and not merely to gather general, administrative, or commercial information, jeopardizes the credit claim.

5.2. Claiming the Credit: Idaho Form 67

Idaho businesses claim the credit using Form 67, Credit for Idaho Research Activities, which is submitted with the annual Idaho income tax return.2 The calculation process follows the federal framework (regular method or alternative simplified credit method) but is strictly limited to Idaho-sourced qualified research expenses.1

The calculation methodology, which determines the credit as 5% of incremental QREs over a base amount, necessitates meticulous segregation of costs. Crucially, all excluded costs, including those related to surveys and studies, must be removed from the total QRE calculation before the base amount formula is applied.1 The base amount is calculated by multiplying the fixed-base percentage (capped at 16%) by the average Idaho gross receipts for the preceding four years.1

5.3. Statistical Context of Idaho R&D Utilization

Idaho has positioned its R&D credit as a significant economic incentive. Reported case studies show that qualifying companies have earned substantial benefits; for instance, one company earned an additional $166,300 in Idaho state R&D credits over a four-year period, supplementing their federal claims.15 Other state incentives, such as the Investment Tax Credit (ITC) for property investment 16, further demonstrate Idaho’s commitment to industrial growth.

The existence of a strong incentive, which includes a favorable 5% incremental rate and a 14-year carryforward provision 1, necessitates a corresponding level of enforcement of the statutory limitations. The regulatory focus on strictly defining qualified research, specifically through the surveys or studies exclusion, ensures that the economic benefit is directed precisely where the legislature intended: to catalyze genuine technological progress within the state, maximizing the return on public investment.

VI. Case Study: Illustrating the Exclusion vs. Qualification (Agri-Tech Robotics Firm)

To illustrate the necessary distinction between an excluded survey or study and a qualifying technical data collection, consider the scenario of an Agri-Tech Robotics firm based in Boise, Idaho.

6.1. Case Setup: Idaho Robotics (IR)

Idaho Robotics (IR) is developing a new autonomous farm vehicle designed for precision pesticide application. The core technological uncertainty that must be resolved is: Can the newly developed sensor fusion algorithm effectively navigate uneven, sloping terrain at the required operating speed of 15 miles per hour while maintaining a minimum 99% accuracy rate in differentiating crops from weeds? This uncertainty requires technical experimentation.

6.2. Example A (Excluded): The User Feedback Study and Management Efficiency Review

• Activity 1: Market Study and Consumer Survey. IR engages a third-party firm to conduct interviews and distribute surveys to 20 potential customers (farmers across Idaho) to determine their anticipated willingness to pay for the new robotic platform. The survey also solicits user input on preferred control mechanisms (e.g., joystick vs. integrated mobile app interface).9

• Costs: $15,000 for contract research and internal wages related to managing the survey logistics.
• Conclusion: This activity is definitively excluded. It constitutes Market research, testing, or development and falls under the Surveys or studies exclusion.9 The data gathered pertains to commercial feasibility and consumer preference, not the resolution of the sensor fusion algorithm’s technical performance uncertainty. These costs must be excluded from Form 67 QREs.

• Activity 2: Internal Management Study. IR internally commissions an “Efficiency Survey” of its engineering department. The goal is administrative: to reorganize the team structure and change workflow reporting methods to optimize general administrative (G&A) cost tracking.9

• Costs: $25,000 in consulting fees and internal management wages.
• Conclusion: This activity is excluded as a Management function or technique study.9 It focuses on organizational structure and financial reporting rather than technical research.

6.3. Example B (Qualified): The Technical Data Collection and Experimentation

• Activity 3: Systematic Technical Data Collection (Experimentation). To resolve the technical uncertainty, IR’s Idaho-based engineers conduct 100 systematic field trials in a controlled environment. They test the robot using three different prototype sensor arrangements (Prototypes A, B, and C), varying terrain slopes and speeds up to 15 mph. Engineers log, process, and analyze 500 hours of performance data—measuring navigation stability, speed retention, and the algorithm’s accuracy rate against the target 99% threshold.

• Purpose: The data collection (the technical “study” of performance metrics) is the means by which the specific technical uncertainty about the sensor fusion algorithm’s performance is systematically resolved. The collection of this data is integral to the process of experimentation.12
• Conclusion: Wages paid to the engineers conducting the trials, the cost of the test sensors (supplies), and 65% of contract research for specialized data processing are Qualified Research Expenses (QREs).6 This activity is fundamentally different from a commercial survey; it is focused entirely on the technological limits and functions of the business component.

VII. Strategic Recommendations for Idaho Taxpayers

7.1. Internal Cost Accounting and Segregation Protocols

To ensure compliance with IDAPA 35.01.01.720, businesses must implement granular accounting procedures that strictly separate excluded costs from qualifying R&D costs at the project and general ledger level. The risk of commingling non-qualified expenses (marketing, HR, routine testing, and management studies) with QREs is substantial and requires mandatory separation protocols.6

Documentation is the bedrock of compliance. All R&D projects should have contemporaneous records detailing:

1. The technical uncertainties that necessitate the research.
2. The systematic process of experimentation used.
3. A clear explanation of how any data collected or analyzed (the “study” components) contributed directly and necessarily to the resolution of the stated technical uncertainties, thereby preempting any audit argument that the activity was a mere administrative or commercial survey.9

7.2. Audit Defense Strategies Regarding Excluded Activities

Because the Idaho credit follows the federal rules (IRC §41) 8, Idaho taxpayers must prepare audit responses based on established IRS regulations, court cases, and the definitions found in the IRS ATGs. When the ISTC questions whether a “study” is excluded, the defense strategy must demonstrate that the activity meets the federal four-part test and is not focused on the non-technical activities specifically listed in IRC §41(d)(4).10 A successful defense requires linking every dollar claimed for personnel time or supplies directly back to the technical efforts to overcome uncertainty, not to the ancillary, excluded activities like market feasibility or routine quality checks.

7.3. Maximizing the 14-Year Carryforward Provision

The 14-year carryforward period permitted by Idaho Code is a powerful incentive, offering stability for long-term tax planning.3 However, this provision also means that flawed cost segregation in the current tax year can create a durable compliance liability. A determination by the ISTC that costs associated with surveys or management studies were improperly included in the QRE base has a compounding and long-lasting negative impact, potentially voiding credit benefits claimed across subsequent tax years. Robust compliance and conservative application of the exclusions in the early years are therefore essential for maximizing the long-term utility of the Idaho R&D credit.

VIII. Conclusion

The “Exclusion: Surveys or Studies” is a defining boundary for the Idaho Credit for Research Activities, mandated by the ISTC’s adoption of federal IRC §41 definitions.8 This exclusion serves to distinguish between genuine technological innovation and routine business functions like market research, organizational studies, and standard quality control.

Idaho businesses benefit from a generous 5% incremental credit rate and a valuable 14-year carryforward period.1 However, leveraging this incentive requires disciplined compliance. Taxpayers must rigorously separate costs associated with excluded surveys and studies from qualifying technical experimentation. By maintaining meticulous documentation that articulates the resolution of technological uncertainty and segregating non-qualified administrative and commercial research expenses, Idaho companies can confidently claim the credit on Form 67 and secure the long-term tax advantages intended to spur economic growth within the state.

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