A common question is whether third-party testing lab costs can count toward the R&D tax credit. The short answer is that testing lab costs may count as contract research if the testing is part of a process of experimentation on behalf of the taxpayer. Routine certification testing generally is not qualified research, and location and contract facts matter. This page explains the framework in general terms. It is educational and is not individualized advice. For the contract research framework, see our page on contractor costs.
When Testing Lab Costs May Warrant Review
Third-party testing lab costs may warrant review when the testing is part of a process of experimentation directed at eliminating a technical uncertainty about a business component. Under the four-part test, the testing must be for a permitted purpose, be technological in nature, be intended to eliminate uncertainty, and be conducted through a process of experimentation. The testing must be performed on behalf of the taxpayer, the taxpayer must bear the economic risk, and the taxpayer must retain substantial rights.
Routine Certification vs. Experimentation
A central distinction is between routine certification testing and experimentation:
- Routine certification testing — testing to certify that a product meets an established standard or specification. The test method, the specification, and the expected result are all known. This is certification, not experimentation, and generally is not qualified research. For more, see our page on certification testing.
- Experimental testing — testing alternative designs, materials, or processes to resolve a technical uncertainty about a business component. This may warrant review as qualified research, provided the other elements are met.
Contract Research Rules
Where the testing lab costs may qualify, they are taken into account as contract research under Section 41(b)(3). This means 65 percent of the amounts paid to the testing lab may be taken into account, not the full amount. The research must be performed on behalf of the taxpayer, the taxpayer must bear the economic risk, and the taxpayer must retain substantial rights. For more, see our page on contractor costs.
Location
Section 41 excludes research conducted outside the United States from qualified research. If the testing lab performs the testing outside the United States, the costs generally may not be taken into account for the federal credit. The location of the testing lab is what matters. For more, see our page on research outside the United States.
Hypothetical Example
Consider a manufacturer that is developing a new product and is uncertain whether an alternative material can achieve the required performance. The manufacturer engages a U.S.-based testing lab to test alternative materials as part of the manufacturer's development process. The manufacturer pays the lab for the testing regardless of outcome, retains exclusive rights to the results, and the testing is performed in the United States. Under these facts, 65 percent of the amounts paid to the lab may be taken into account as contract research, provided the testing is part of a process of experimentation and the other elements are met.
By contrast, if the lab simply certifies that a production product meets an established standard, that is routine certification, not research.
This example is illustrative only and does not state that the costs definitely qualify.
Documentation That May Help
Records that can help support testing lab cost claims include the engagement agreements, statements of work (showing the testing purpose), test results, provisions allocating rights, records of where the testing was performed, and invoices tied to specific projects. For more, see our page on contractor documentation.
Key Takeaway
Third-party testing lab costs may count toward the R&D tax credit as contract research if the testing is part of a process of experimentation on behalf of the taxpayer. Routine certification testing generally is not qualified research, and location and contract facts matter. Because the analysis is fact-specific, professional review is appropriate.