The 80% Rule and Process of Experimentation: What Tax Teams Need to Prove in 2025

The IRS is tightening enforcement around what counts as qualified research—and the 80% rule is becoming a focal point.

For tax teams at large companies, that means proving substantially all of the activities related to a business component meet the Process of Experimentation (PoE) standard.

Here’s what the IRS expects—and how your documentation strategy needs to change.

What Is the 80% Rule?

According to Treasury Regulation 1.41-4(a)(6), at least 80% of research activities (measured on a cost or time basis) must involve:

• A scientific or technological uncertainty
• A hypothesis for eliminating that uncertainty
• Experimentation to evaluate alternatives
• A systematic evaluation of results

This is what the IRS calls a Process of Experimentation—and only activities that meet this threshold can be included as qualified research expenses (QREs).

What Changed After Little Sandy Coal?

The Little Sandy case clarified that support and supervision activities may not count toward the 80%.

This ruling raised the bar for what companies must document:

• Who did the work?
• What did they seek to discover?
• Did they follow a methodical process of testing?

If your tax credit calculation includes a large share of general oversight, it may fail the 80% test.

How to Document PoE the Right Way

• Break down activities by individual and business component
• Tag roles as Direct Research, Supervision, or Support
• Describe the technical challenge + hypothesis + experiment + result.
• Use real documentation (not just interviews)—e.g. test results, models, design drafts, Jira tickets.

Visualizing the 80% Rule

Imagine your denominator is 1,000 hours across a business component. To qualify:

• ≥ 800 hours must be documented as direct experimentation
• Supervision, meetings, project management, and support may not count

If only 600 hours are experimental, the entire component is disqualified.

Final Thoughts: Prove It or Lose It

The 80% rule isn’t new—but the IRS is enforcing it like never before. Don’t assume your process qualifies. Document it. Break it down. Validate it.

Still unsure if you’re capturing the right activities? Schedule a consultation with the MASSIE team—we’ll help you strengthen your claim from the ground up.

Jason Massie, CPA, Esq.

As the Founder and President of MASSIE R&D Tax Credits, Jason is responsible for the quality, consistency, and integrity of our services. His strategic vision and leadership drive innovation within the company, encouraging collaboration and ne...