A common question is whether research performed by foreign contractors counts for the federal R&D tax credit under Section 41. The short answer is that research performed by contractors outside the United States is generally excluded from qualified research under Section 41(d)(4)(F), regardless of who pays for it. This page explains the framework in general terms. It is educational and is not individualized advice. For the foundational framework, see our page on qualified research expenses.
Key Considerations
The analysis depends on the specific facts and circumstances. Under the four-part test, qualified research must be for a permitted purpose, be technological in nature, be intended to eliminate uncertainty, and be conducted through a process of experimentation.
Common scenarios that may warrant review include:
- New development — evaluating alternative approaches to resolve uncertainty about whether a new approach can achieve the required performance.
- New arrangement — testing alternative approaches to resolve uncertainty about whether a new arrangement can achieve the required outcome.
- New application — evaluating alternative approaches to resolve uncertainty about whether an existing approach can perform in a new context.
- New requirement — testing alternative approaches to resolve uncertainty about whether a new requirement can be met.
Foreign-Research Exclusion
Under Section 41(d)(4)(F), research conducted outside the United States is excluded from qualified research. The exclusion turns on where the research is performed, not where the products are manufactured or where the taxpayer is located.
Hypothetical Example
Consider a company that is evaluating a new approach and is uncertain whether any available method can achieve the required outcome. The company evaluates alternative approaches, tests each, and systematically varies the approach to resolve the uncertainty. This may warrant review as qualified research.
By contrast, if the same company performs routine work using established methods, that is routine work, not research.
This example is illustrative only and does not state that the activity definitely qualifies.
Documentation That May Help
Records that can help support this work include records identifying the uncertainty and alternative approaches, test results, and records of how results informed decisions. For more, see our page on R&D tax credit documentation.
Key Takeaway
Research performed by contractors outside the United States is generally excluded from qualified research under Section 41(d)(4)(F), regardless of who pays for it. Because the analysis is fact-specific, professional review is appropriate before claiming the credit.