Expert Report: The Exclusion of “Surveys or Studies” in the Illinois R&D Tax Credit

The exclusion of “Surveys or Studies” bars claims for expenditures related to general business functions, such as market research, efficiency reviews, and routine data collection, from the Illinois R&D tax credit. These activities are non-qualifying because they do not involve the required technical experimentation or resolution of scientific uncertainty necessary for the credit.

The Illinois Research and Development (R&D) Tax Credit is a powerful state incentive codified under 35 ILCS 5/201(k), designed to encourage technical innovation and investment within Illinois.1 Because the state’s eligibility standards explicitly mirror the federal framework established by Internal Revenue Code (IRC) Section 41 1, the application of this exclusion is critical for compliance. The purpose of excluding “Surveys or Studies” is to draw a clear legislative line, ensuring that the 6.5% credit 1 subsidizes only genuine technical research—activities fundamentally rooted in physical science, engineering, or computer science—rather than routine business administration, marketing efforts, or management functions.2

This rigorous requirement means that taxpayers claiming the credit must implement thorough internal controls to separate qualified research expenses (QREs) from non-qualified activities. Specifically, the scope of the “Surveys or Studies” exclusion is derived from IRC Section 41(d)(4) and the associated Treasury Regulations, which delineate specific non-technical activities, such as management functions, efficiency studies, and market research, as non-qualified expenditures.3 Implementing rigorous time-tracking and cost segregation is essential to ensure that wages and supply costs are allocated solely to technical experimentation and strictly separated from non-qualifying survey activities, a necessary practice emphasized by the Illinois Department of Revenue (IDOR) to maintain compliance and prepare for potential audits.5

II. Legal Foundation: Nexus Between Illinois Law and Federal Exclusions

A precise understanding of the “Surveys or Studies” exclusion requires establishing the strong legal connection between the Illinois statute and the federal tax code that defines the credit’s boundaries.

A. Statutory Authority: The Illinois R&D Credit

The Illinois R&D tax credit is a nonrefundable incentive claimed against corporate income tax liability.5 It is provided under the Illinois Income Tax Act (IITA) Section 201(k), with operational guidance detailed in the Illinois Administrative Code (86 Ill. Adm. Code 100.2160).5

The credit calculation is structured to reward increased investment in research activity. The credit equals 6.5% of the qualifying expenditures that exceed a calculated base amount.1 This base amount is defined as the average of the qualifying expenses incurred during the three taxable years immediately preceding the current year.2 This incremental structure means that improper inclusion of excluded activities, such as surveys, can significantly skew the base amount, affecting calculations for current and future tax years. The credit is a sustained state priority, having been extended through tax years ending on or before December 31, 2031, pursuant to Public Act 103-0595.1

Table 1: Illinois R&D Tax Credit Key Parameters (35 ILCS 5/201(k))

B. The Mandatory Federal Standard Nexus (IRC § 41)

Illinois law requires that eligibility for the state credit align with the federal standards set forth in IRC § 41.1 This mandatory federal nexus means that federal regulations, including the detailed exclusions listed in IRC § 41(d)(4) and defined in Treasury Regulations, govern how IDOR interprets non-qualified research activities.

For research activities to qualify for the credit, they must meet the stringent four-part test derived from IRC § 41(d).2 This test mandates that the activities must be: (1) Technological in Nature (relying on physical science, engineering, or computer science); (2) performed for a Permitted Purpose (improving functionality, performance, or quality of a business component); (3) intended to Eliminate Uncertainty (discovering information to resolve technical unknowns); and (4) involve a Process of Experimentation (evaluating alternatives).2

Activities characterized as “Surveys or Studies” fail this standard because they generally do not involve the required technological principles, do not eliminate technical uncertainty, and lack a systematic, scientific process of experimentation. Because the IDOR does not publish a separate state definition for this exclusion, an auditor tasked with reviewing an Illinois claim will rely heavily on established federal precedents, such as the IRS Audit Technique Guide, to verify that claimed QREs are not excluded activities. Consequently, Illinois taxpayers must adopt federal documentation standards to successfully support their claims against this exclusion.

Furthermore, the Illinois statute groups the “surveys or studies” exclusion with several other exclusions, including research in the social sciences, arts, or humanities; research conducted after commercial production; and duplication of an existing product.5 This grouping provides clear context on the philosophical boundary of the incentive. The consistent exclusion of activities rooted in consumer behavior, management science, and aesthetics 10 confirms that the state seeks to fund hard technical research and development leading to tangible technological advancement, not general business knowledge acquisition.

III. Definitive Analysis: Deconstructing the “Surveys or Studies” Exclusion

Compliance necessitates a detailed analysis of the types of activities the exclusion targets, moving beyond the simple terminology. The regulatory guidance adopted by Illinois interprets “Surveys or Studies” as encompassing three major categories of non-scientific investigation.

A. General Principle: Non-Scientific Investigation

The core principle differentiating qualified R&D from excluded surveys or studies is the nature of the uncertainty being addressed. Qualified R&D resolves technical uncertainty (e.g., whether a material can withstand extreme heat), whereas excluded activities typically resolve non-technical uncertainty (e.g., whether customers prefer Product A over Product B, or the optimal arrangement of an office floor plan).

Surveys and studies often aim to resolve business, market, or aesthetic questions.10 This includes research related to style, taste, cosmetic changes, or seasonal design factors, all of which are explicitly non-qualified.11 While qualified research requires a formal process of experimentation to evaluate alternatives 11, excluded surveys merely involve data collection and aggregation without the underlying scientific methodology or technical rigor required by the federal and state tax codes.

B. Key Components of the Exclusion Under Regulatory Guidance

Based on federal guidance that defines IRC § 41(d)(4) 4, the specific activities that constitute excluded surveys or studies fall into clear categories relevant to Illinois claims.

1. Management Functions and Efficiency Surveys

This category excludes research focused on optimizing internal business operations through management theories or techniques, rather than technological changes. Specific examples include the analysis of organizational structures, preparing financial data and analysis, developing employee training programs, and implementing management-based changes in production processes, such as rearranging work stations on an assembly line.3 These studies are rooted in management science or efficiency optimization, and are not directed at resolving uncertainties related to physical, engineering, or computer science principles.

2. Market Research, Testing, and Development

Activities centered on market acceptance, customer demand, or preference are excluded from QREs. This category explicitly captures activities such as advertising or promotion efforts, focus groups, and studies designed to test brand or packaging appeal.4 For instance, a software company developing a new machine learning algorithm performs qualified research because it relies on computer science and engineering; however, market research conducted to determine consumer reception of that algorithm’s pricing structure or features is excluded because it lacks technical foundation.12

3. Routine Data Collection and Routine Testing/Quality Control (QC)

Simple administrative data collection or the compilation of readily available public information (literature reviews) that is not necessary for a current, ongoing process of experimentation is categorized as an excluded study.4

The exclusion also specifically targets routine or ordinary testing or inspections for quality control.3 If testing is conducted merely to confirm that a final product meets established specifications, it is excluded. Conversely, quality control testing is qualified only when it is part of the iterative, experimental phase intended to resolve a technical unknown concerning the development or improvement of the business component.11

C. Overlap with Other Exclusions

The interpretation of the “Surveys or Studies” exclusion frequently overlaps with other statutory exclusions, posing a compounded risk of disallowance. For example, the Illinois statute also excludes research relating to certain internal-use computer software (IUS).9 Development projects for IUS often involve extensive user experience (UX) research and internal efficiency studies (e.g., surveying employee needs for a new administrative platform). If the software development fails to meet the high threshold for qualified IUS research, and the associated labor costs involve general efficiency or user satisfaction surveys, those costs are subject to exclusion under both the IUS rule and the “Surveys or Studies” rule.

Furthermore, contract expenses are generally included as QREs if they are paid to a third party for qualified research.1 However, if a company contracts a consulting firm to perform an “efficiency survey” or a “management functions” analysis, the entire contract expense must be disallowed as an excluded study.4 The focus of the contracted work must be demonstrably technical and experimental, not managerial or administrative, to be included.

IV. IDOR Compliance, Forms, and Audit Guidance

The Illinois Department of Revenue’s (IDOR) formal documentation and audit focus underscore the necessity of adhering strictly to the exclusions, including “Surveys or Studies.”

A. Explicit IDOR Guidance in Tax Schedules

The R&D credit is claimed using the Schedule 1299 series (such as Schedule 1299-D for corporations).5 The instructions provided by the IDOR for these schedules explicitly list activities that cannot be claimed for the credit. The published list includes “surveys or studies,” grouping them with other clearly non-technical activities like research in the social sciences, arts, or humanities; research conducted outside Illinois; and research conducted after the beginning of commercial production.5 The presence of “surveys or studies” on this official schedule instruction sheet provides binding guidance to taxpayers regarding the credit’s application.

B. IDOR Interpretation and Audit Risk Areas

The IDOR’s audit program aims to promote voluntary compliance and correct improper tax claims by verifying the procedures used to calculate the tax base and claimed deductions.14 Due to the complexity of the R&D credit, two areas are recurrently flagged during compliance reviews, often in connection with the surveys or studies exclusion:

1. Wage Documentation and Segregation: The most common compliance failure involves wage expenses, which are often not clearly documented.5 Auditors require detailed records demonstrating how much time an employee spent on activities directly associated with qualified technical experimentation versus time spent on excluded activities. If a project engineer splits time between resolving a technical uncertainty related to a product design and participating in an internal efficiency study, the portion of wages attributable to the efficiency study (the excluded survey) must be removed. The failure to detail time at this granular level results in the disallowance of claimed QREs.5
2. Improper Deduction Classification: The IDOR frequently identifies taxpayers claiming improper business deductions or reporting disproportionately large expenses relative to income.15 Costs related to excluded surveys, market research, or management studies are often erroneously included in QREs. The inclusion of these non-technical costs increases the probability of an audit and exposes the taxpayer to liabilities, penalties, and interest on the disallowed amounts.

To address these documentation issues, the IDOR provides guidance recommending that cost centers be established to capture the basis of the Illinois credit.5 By proactively structuring the accounting system to segregate costs flowing from non-qualified activities (like management studies) from technical QREs, businesses significantly improve their audit defense posture.

Failure to properly exclude survey costs can have a multiplicative negative impact on claims across multiple tax years. If the IDOR disallows survey costs improperly included in Year 1 QREs, not only must the Year 1 credit liability be recalculated, but the recalculated, lower QRE figure must be used to determine the base amount for the subsequent three tax years.7 This corrective action can retroactively decrease the incremental credit calculated for future years, leading to a complex and costly restatement of returns.

V. Practical Distinction and Example Scenarios

The practical application of the “Surveys or Studies” exclusion is best demonstrated by comparing non-qualifying business activities with qualified technical experimentation.

A. Scenario 1: Market Research vs. Material Science Experimentation

A firm in the aerospace manufacturing sector in Illinois is developing a novel, lightweight alloy for use in jet engine components.

• Excluded Activity (Surveys or Studies): The company hires a marketing firm to conduct market research to forecast demand, determine the optimal pricing model, and survey potential customers regarding their preferred delivery timelines. Additionally, engineers are asked to spend 10% of their time compiling existing literature to prepare a strategic study on competing alloys.

• Basis for Exclusion: These activities relate to business strategy, sales, pricing, and routine data compilation, not the resolution of technical uncertainty concerning the alloy’s physical performance.4

• Qualified Activity (R&D): Metallurgists conduct controlled experimentation by varying the ratio of constituent metals, subjecting the resultant prototypes to cyclic loading tests to determine the alloy’s specific resistance to fatigue at high temperatures. The analysis of the data generated by these tests determines the necessary composition changes for the next batch of prototypes.

• Distinction: The market study informs commercial decisions; the material science experimentation resolves technical feasibility using the principles of engineering and physical science.2

B. Scenario 2: Efficiency Survey vs. Process Engineering Experimentation

An Illinois-based food processing plant is automating its packaging line.

• Excluded Activity (Surveys or Studies): The plant manager initiates an efficiency survey of the existing workforce, documenting manual processing times and employee movement patterns. The result is a study recommending the rearrangement of manual staging areas and changes to supervisory reporting structures to increase hourly throughput.

• Basis for Exclusion: This constitutes an excluded management function or technique focused on human resources and organizational workflow, rather than technological uncertainty.4

• Qualified Activity (R&D): Process engineers test three different sensor arrays to determine which configuration provides the necessary reliability and speed to track packaged goods through a newly designed high-speed sorter system. They conduct experimentation to resolve the technical challenge of sensor interference and latency, adjusting code and physical placement iteratively.

• Distinction: The excluded survey addresses management workflow; the qualified activity addresses the technical performance and integration of engineering components.

C. Scenario 3: Routine Testing vs. Experimental Testing

A medical device company is finalizing a prototype of a new surgical instrument.

• Excluded Activity (Surveys or Studies): The final production team performs routine quality control checks on the first batch of instruments to ensure they match the established dimensions and material specifications listed in the finalized design document.

• Basis for Exclusion: This is routine testing conducted after the beginning of commercial production to confirm established quality specifications, rather than discovering information to eliminate technical uncertainty.3

• Qualified Activity (R&D): Prior to finalizing the design, the R&D team performs destructive testing on various prototypes of the instrument’s joint assembly. This involves subjecting the joints to forces exceeding the expected operational limits to determine the maximum tolerable stress point. This experimentation is necessary to inform the final material selection and design specifications.

• Distinction: The excluded activity confirms known specifications; the qualified activity generates new technical data to resolve design uncertainty.

VI. Conclusion and Recommendations for Claim Integrity

The exclusion of “Surveys or Studies” is a non-negotiable compliance pillar of the Illinois R&D tax credit framework. It serves as a regulatory gatekeeper, ensuring that state benefits are reserved for innovation rooted in scientific and engineering principles, thereby excluding expenses related to management, marketing, or routine operational analysis. Taxpayers must recognize that the IDOR relies heavily on the detailed definitions provided by federal regulations (IRC § 41(d)(4)) when adjudicating claims.

To minimize audit exposure and maintain the integrity of Illinois R&D tax credit claims, taxpayers should implement robust internal procedures centered on detailed documentation and cost segregation:

1. Strict Time Allocation and Segregation: Taxpayers must mandate and enforce detailed, contemporaneous time tracking that segregates employee labor between qualified research tasks and excluded activities, such as management meetings or efficiency surveys. Without this granular data, the IDOR may disallow all wages claimed for employees who participated in any excluded activities.5
2. Establish Formal Cost Centers: Accounting systems should be formally structured with distinct cost centers dedicated to capturing QREs, separate from those tracking expenses associated with general marketing, management, and administrative functions. This systematic segregation provides a clear auditable trail, directly supporting the basis of the Illinois credit calculation.5
3. Contemporaneous Documentation of Uncertainty: All claimed research activities must be supported by documentation that explicitly articulates the technical uncertainty that the activity sought to resolve, the scientific method applied, and the iterative, experimental process used. This documentation is crucial to counter any classification of the work as a “routine study” or “adaptation” of an existing component.
4. Adherence to Federal Standards: Given that Illinois R&D eligibility mirrors IRC § 41, all documentation and cost categorization must meet the rigorous standards expected by federal regulations. A claim that is insufficiently documented or fails the federal four-part test for technical rigor is inherently vulnerable to disallowance by the IDOR.

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/