Reconciling contract research expenses is an important part of supporting the contract research component of qualified research expenses. This page explains how to reconcile contract research QREs. It is educational and is not individualized advice. For the contract research framework, see our page on contractor costs.
Why Contract Research Reconciliation Matters
Contract research reconciliation helps support the accuracy of the contract research QREs by connecting them to vendor records and verifying the requirements. The IRS has noted that studies which fail to connect specific projects and activities to the underlying costs can fail to establish the required nexus.
What to Reconcile
The contract research reconciliation involves:
- Total payments — the total amounts paid to outside parties for qualified research.
- 65% inclusion — 65% of the amounts paid (under Section 41(b)(3)(A)).
- Qualified research — verifying that the work constituted qualified research.
- Economic risk — verifying that the taxpayer bears the economic risk.
- Substantial rights — verifying that the taxpayer retains substantial rights.
- U.S. research — verifying that the research was performed in the United States.
For more on contract research, see our page on contractor documentation.
How to Reconcile
A useful reconciliation approach involves:
- Identify the contract research QRE total — the total contract research QREs.
- Identify the vendor total — the total payments to vendors from accounts payable.
- Apply the 65% factor — verify that the QREs reflect 65% of the payments.
- Document the requirements — document that the work constituted qualified research, the taxpayer bears the economic risk, the taxpayer retains substantial rights, and the research was performed in the U.S.
- Address differences — explain any differences between the QRE total and the vendor total (e.g., excluded payments, allocations).
Hypothetical Example
Consider a manufacturer that has contract research QREs of $65,000. The company reconciles this to vendor records by showing the total payment to the vendor ($100,000), the 65% inclusion ($65,000), and the documentation confirming that the work constituted qualified research, the taxpayer bears the economic risk, the taxpayer retains substantial rights, and the research was performed in the U.S. This reconciliation helps support the accuracy and nexus of the contract research QREs.
This example is illustrative only.
Key Takeaway
Reconciling contract research expenses involves connecting contract research QREs to vendor records, verifying the 65% inclusion, and confirming economic risk and substantial rights. Because reconciliation is fact-specific, professional review is appropriate.