Qualified Research Expenses

What Are Qualified Research Expenses?

Qualified research expenses are the costs that may be taken into account in computing the R&D tax credit — primarily certain wages, certain supplies, and certain contract research associated with qualified research activities.

Do Employee Wages Count for the R&D Tax Credit?

Certain employee wages may be taken into account as qualified research expenses when the employee engages in qualified research, or in the direct supervision or direct support of qualified research activities. Job title alone does not determine treatment, and time and activity allocations can matter.

Do Contractor Costs Count for the R&D Tax Credit?

Certain contractor costs may be taken into account as qualified research expenses when an outside party performs qualified research on behalf of the taxpayer, the taxpayer bears the economic risk, and the taxpayer retains substantial rights to the results. An invoice alone does not establish qualified treatment.

Do Supplies Count for the R&D Tax Credit?

Certain supplies — tangible property other than land and depreciable property, used in the conduct of qualified research — may be taken into account as qualified research expenses. Not every item purchased for a project qualifies, and capital property generally requires different analysis.

Do Prototype Costs Count for the R&D Tax Credit?

Prototype costs may relate to the R&D tax credit when the prototype materials are tangible supplies consumed or used in the conduct of qualified research. But a prototype that is depreciable property, sold, or used in commercial production generally is not a supply, and the analysis turns on the specific facts.

Do Materials Count for the R&D Tax Credit?

Materials may be taken into account for the R&D tax credit when they are tangible supplies consumed or used in the conduct of qualified research. Materials held for resale, used in commercial production, or that are depreciable property generally are not supplies, and the analysis turns on the specific facts.

Do Testing Costs Count for the R&D Tax Credit?

Testing costs may relate to the R&D tax credit when the testing is part of a process of experimentation directed at eliminating a technical uncertainty. The costs that may be taken into account include certain wages, certain supplies, and certain contract research — but routine quality-control testing generally is not qualified research.

Do Tooling Costs Count for the R&D Tax Credit?

Tooling costs may relate to the R&D tax credit when the tooling is experimental — used and consumed in qualified research — but dies, molds, fixtures, and jigs that are capital property generally are not supplies. The wages and contract research associated with developing tooling through a process of experimentation may warrant separate review.

Do Equipment Costs Count for the R&D Tax Credit?

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.

Do Engineering Costs Count for the R&D Tax Credit?

Engineering costs may relate to the R&D tax credit when the engineering work constitutes qualified research or direct support of qualified research. Employee engineering wages and outside engineering costs may warrant review, but ordinary engineering that does not satisfy the four-part test generally is not a qualified research expense.

Do Design Costs Count for the R&D Tax Credit?

Design costs may relate to the R&D tax credit when the design work is technical — directed at developing or improving a business component through a process of experimentation. Aesthetic, style, taste, and cosmetic design is expressly excluded by statute, and the distinction turns on what the design was directed at.

Can Production Employee Wages Count as R&D Expenses?

Production employee wages may count as QREs when the employee engages in or directly supports qualified research. Routine production work generally is not a qualified service.

Can Supervisor Wages Count Toward the R&D Tax Credit?

Supervisor wages may count as QREs when the supervisor engages in direct supervision of qualified research. General management generally is not a qualified service.

Can Manager Wages Count Toward the R&D Tax Credit?

Manager wages may count as QREs when the manager engages in direct supervision or direct support of qualified research. General management generally is not a qualified service.

Can Founder Wages Count Toward the R&D Tax Credit?

Founder wages may count as QREs when the founder receives W-2 wages and engages in qualified services. Unpaid founder time generally does not create wage QREs.

How Are Engineer Wages Treated for the R&D Tax Credit?

Engineer wages may count as QREs when the engineer engages in qualified research or direct support. Routine engineering work generally is not a qualified service.

Can Technician Wages Count Toward the R&D Tax Credit?

Technician wages may count as QREs when the technician engages in direct support of qualified research. Routine testing generally is not a qualified service.

Can Software Developer Wages Count Toward the R&D Tax Credit?

Software developer wages may count as QREs when the developer engages in qualified research. Routine software development generally is not a qualified service.

What Is Direct Supervision of Qualified Research?

Direct supervision means directly overseeing qualified research activities. General management or administration generally does not constitute direct supervision.

What Is Direct Support of Qualified Research?

Direct support means directly assisting the conduct of qualified research. Indirect or general support generally does not constitute direct support.

What Is the “Substantially All” Rule for R&D Wages?

Under the substantially-all rule, if substantially all of an individual’s services consist of qualified services, all of their wages may be treated as qualified services.

Can Independent Contractor Research Costs Count?

Independent contractor research costs may count as QREs at 65% when the contractor performs qualified research on behalf of the taxpayer, the taxpayer bears economic risk, and retains substantial rights.

Can Consulting-Firm Research Costs Count Toward the Credit?

Consulting-firm research costs may count as QREs at 65% when the firm performs qualified research on behalf of the taxpayer, the taxpayer bears economic risk, and retains substantial rights.

How Are Research Consortium Payments Treated for the R&D Tax Credit?

Payments to qualified research consortia may be taken into account at 75% under Section 41(b)(3)(C), compared to the general 65% for contract research.

Can Research Performed by Foreign Contractors Count?

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.

Can U.S. Research Performed for a Foreign Company Qualify?

U.S.-based research performed for a foreign company may qualify if the taxpayer bears economic risk and retains substantial rights, but funded-research rules may apply.

How Do Reimbursed Research Costs Affect the R&D Tax Credit?

Reimbursed research costs may be excluded as funded research if the reimbursement means the taxpayer does not bear the economic risk of failure.

How Do Milestone-Payment Contracts Affect the R&D Tax Credit?

Milestone-payment contracts may affect whether the taxpayer bears economic risk. The funded-research analysis examines the specific contract terms, not the label.

How Do Contingent-Payment Contracts Affect the R&D Tax Credit?

Contingent-payment contracts may affect whether the taxpayer bears economic risk. The funded-research analysis examines whether the taxpayer bears the risk of failure.

Does IP Ownership Determine Who Can Claim the R&D Tax Credit?

IP ownership is relevant but not solely determinative. The funded-research analysis examines substantial rights and economic risk, not just IP ownership.

What Are “Substantial Rights” in Funded Research?

Substantial rights means the taxpayer retains meaningful rights in the research results. The analysis examines the specific contractual arrangement.