A common question is how joint product development — where two or more parties collaborate on developing a product — affects the R&D tax credit. The short answer is that joint development may affect the credit differently for each party, depending on rights, funding, expenses, and research location. Each party must independently satisfy the requirements, and double assumptions should be avoided. This page explains the framework in general terms. It is educational and is not individualized advice. For the foundational framework, see our page on funded research.
Each Party Must Independently Qualify
In a joint development arrangement, each party must independently satisfy the requirements of Section 41. For a party to take costs into account as qualified research expenses, the research must be performed on behalf of that party, that party must bear the economic risk, and that party must retain substantial rights to the results. The fact that another party is also involved does not automatically qualify or disqualify either party.
Rights
The allocation of rights to the research results is a key factor. Where one party retains exclusive rights, that party may retain substantial rights. Where rights are shared, the analysis is more nuanced and depends on the specific arrangement. Where a party retains no substantial rights, the research may be funded for that party. For more, see our page on funded research.
Funding
The funding arrangement is also key. If one party funds the research and bears the economic risk, that party may be able to take the costs into account (subject to the rights analysis). If the research is funded by another party, the performing party may not be able to take the costs into account. The payment structure and the allocation of risk matter.
Expenses
Each party may have different expenses — wages for its own employees, payments to the other party, or shared costs. The expenses that may be taken into account depend on which party bears the economic risk and retains substantial rights. A party that does not bear the economic risk or does not retain rights generally may not take the costs into account.
Research Location
Section 41 excludes research conducted outside the United States from qualified research. In a joint development arrangement, the location of each party's research activities matters. A party whose research is performed in the United States may potentially take those costs into account; a party whose research is performed outside the United States generally may not. For more, see our page on research outside the United States.
Avoiding Double Assumptions
A risk in joint development is double assumptions — both parties assuming they can take the same costs into account. Each cost can generally only be taken into account by one party — the party that bears the economic risk and retains substantial rights. The parties should coordinate to avoid double assumptions and ensure that each cost is taken into account by the appropriate party, if any.
Hypothetical Example
Consider two companies that jointly develop a new product. Company A performs the research in the United States, bears the economic risk, and retains exclusive rights to the results. Company B contributes funding but does not perform research and does not retain rights. Under these facts, Company A may be able to take its research costs into account (subject to the other requirements), while Company B generally may not, because it does not bear the economic risk and does not retain rights.
By contrast, if both companies share rights and both bear economic risk, the analysis is more nuanced and depends on the specific arrangement.
These examples are illustrative only and do not provide legal conclusions about any particular arrangement.
Documentation That May Help
Records that can help support joint development claims include the joint development agreement, provisions allocating rights and funding, expense records for each party, records of where each party's research was performed, and any coordination records avoiding double assumptions. For more, see our page on R&D tax credit documentation.
Key Takeaway
Joint product development may affect the R&D tax credit differently for each party, depending on rights, funding, expenses, and research location. Each party must independently satisfy the requirements, and double assumptions should be avoided. Because the analysis is fact-specific, professional review is appropriate.