A common question is whether equipment costs — the cost of purchasing or building machinery, instruments, or other equipment — count for the federal R&D tax credit under Section 41. The short answer is that the cost of purchasing equipment generally is not a supply, because depreciable property is excluded by statute. However, the wages of employees and certain contract research costs associated with developing equipment through a process of experimentation may warrant separate review. This page explains the framework in general terms and avoids implying that every equipment purchase is a qualified research expense. It is educational and is not individualized advice. For the foundational supply rules, see our page on R&D tax credit supplies.
Why Depreciable Property Differs From Supplies
Under Section 41(b)(2)(C), "supplies" are defined as tangible property other than (i) land and (ii) property of a character subject to the allowance for depreciation. Equipment that is capitalized and depreciated — for example, a machine tool, a spectrometer, or a production line — is depreciable property and is expressly excluded from the supply category. This means the cost of purchasing the equipment itself generally is not taken into account as a supply, even if the equipment is used in a research project.
This is one of the clearest lines in the qualified-research-expense framework: depreciable property is not a supply. A company that purchases a $500,000 testing machine and uses it in qualified research generally cannot take the $500,000 purchase price into account as a supply.
Equipment Used in Research vs. the Cost of the Equipment
There is an important distinction between equipment used in research and the cost of the equipment itself. Even though the purchase price of depreciable equipment is not a supply, the equipment can be used in qualified research, and other costs associated with the research — wages, supplies, and contract research — may be taken into account. The equipment is the tool used to conduct the research; the wages and materials consumed in the research are the costs that may qualify.
Developing New Equipment as Qualified Research
A separate question is whether the activity of developing new equipment can constitute qualified research. If a company is developing a new type of equipment — for example, a new manufacturing machine where the capability or design is uncertain — the wages of the engineers and technicians involved in the development, and certain contract research costs, may warrant review as qualified research expenses, provided the development activity satisfies the four-part test. The cost of the equipment being developed, if it is depreciable property, generally is not a supply, but the wages and contract research associated with the development process may be separate qualified research expenses. For more, see our page on new tools and equipment development.
Computer-Use Costs
The Treasury Regulations under Section 41 (§1.41-2) address amounts paid for the right to use computers in the conduct of qualified research, subject to specific rules. This is distinct from purchasing computer equipment (which is depreciable property) and may warrant review where a taxpayer pays for computer time or cloud computing resources used in qualified research. The specific rules should be consulted.
Hypothetical Example
Consider a company that purchases a commercial testing machine for $200,000 and uses it to run tests as part of a qualified research project. The $200,000 purchase price generally is not a supply, because the machine is depreciable property. However, the wages of the engineers who operate the machine in the qualified research, and the materials consumed in the tests, may warrant review as qualified research expenses, provided the underlying activity constitutes qualified research.
Now consider a different company that is developing a new type of testing machine — one whose capability is uncertain — and employs engineers to design, build, and test prototypes. The wages of those engineers may warrant review as qualified research expenses, even though the prototype machines themselves may be capital property. The development activity and the purchase of a finished machine are different situations.
These examples are illustrative only and do not state that the costs definitely qualify.
What Generally Does Not Fit
Several categories of equipment costs generally do not fit the qualified-research-expense framework as supplies:
- Purchased equipment — depreciable property is excluded by statute.
- Equipment used in routine production — even if used occasionally in research, the purchase price is not a supply.
- Equipment leases — lease costs for equipment may raise different questions and should be evaluated under the applicable rules.
- Equipment maintenance — routine maintenance of equipment is generally not a supply used in qualified research.
Documentation That May Help
Records that can help support equipment-related claims include records distinguishing equipment purchase costs (generally not supplies) from wages and materials consumed in research using the equipment, records of equipment development activities, and records connecting development work to specific business components. For more, see our page on R&D tax credit documentation.
Key Takeaway
Equipment costs generally are not supplies for the R&D tax credit, because depreciable property is excluded by statute. However, the wages of employees and certain contract research costs associated with developing equipment through a process of experimentation may warrant separate review. Not every equipment purchase is a qualified research expense, and the analysis turns on the specific facts. Because these determinations are fact-specific, professional review is appropriate before claiming the credit.