Qualified research expenses, universally shortened to QREs, are the amounts the credit is calculated from. The statute splits them into in-house research expenses and contract research expenses, and the credit is a percentage of the total above a base. This page is the reference for what goes into each category and how it is measured; the eligible expenditure page is the practical walkthrough.
What it is
| Category | Statutory basis | Measure |
|---|---|---|
| Wages for qualified services | In-house research expense, section 41(b)(2)(A)(i) | Wages subject to income tax withholding, for the time spent on qualified services |
| Supplies used in the conduct of qualified research | In-house research expense, section 41(b)(2)(A)(ii) | Cost of tangible property other than land, improvements to land and depreciable property |
| Amounts paid for the right to use computers | In-house research expense, section 41(b)(2)(A)(iii) | Amount paid to another person for computer use in qualified research, where the computer is not owned or operated by the taxpayer or a related person, is located off the taxpayer's premises, and the taxpayer is not the primary user of the computer |
| Contract research | Section 41(b)(3) | 65% of amounts paid to a non-employee for qualified research performed on the taxpayer's behalf; 75% for a qualified research consortium; 100% for certain energy research payments |
Who it applies to
Every claimant computes QREs the same way, and the same QREs feed both methods of calculating the credit. The base period figures used by the regular credit and the three prior years used by the alternative simplified credit must be computed on the same definition as the current year, so a change in how QREs are identified has to be applied consistently to the prior years as well. Members of a controlled group aggregate their QREs.
How it works
Qualified wages. Wages count for qualified services: engaging in qualified research, directly supervising it, or directly supporting it. The measure is wages as defined for income tax withholding, so employer payroll taxes and benefits are outside, while taxable bonuses and stock compensation are inside. Where substantially all, meaning 80% or more, of an employee's services are qualified services, the whole of the wages count; otherwise wages are apportioned by the proportion of time on qualified services. Direct supervision means the immediate supervision of qualified research, not higher-level management; direct support means services such as machining a part or compiling data under a researcher's direction, not general and administrative work.
Supplies. Any tangible property used in the conduct of qualified research other than land, improvements to land, and property of a character subject to depreciation. Prototype materials, consumables and materials destroyed in testing count. Extraordinary utility costs required by the research may count; general utilities do not. Supplies used in the conduct of research are distinguished from supplies used in production or administration by the same four-part test that governs the activity.
Contract research. Three conditions, all from the regulations: the agreement is entered into before the research is performed; the research is performed on behalf of the taxpayer, meaning the taxpayer retains substantial rights in the results; and the taxpayer bears the expense even if the research fails, meaning the payment is not contingent on success. The contractor's work must be qualified research and must be performed in the United States. Payments to a staffing firm for workers who are not the taxpayer's employees are generally contract research expenses, so 65% counts. Prepaid contract research is taken into account in the year the research is performed, not the year paid.
Computer rental. Cloud computing capacity used for development and test environments is the modern form of this category. The amount paid counts in full, provided the computing is used in the conduct of qualified research and not for production hosting.
Worked example
Illustrative example. Fenwick Biosensors, a hypothetical company, has the following costs on qualifying projects. Three scientists spend 90% of the year on qualified research and earn US$150,000 each; a laboratory manager spends 40% directly supervising them and earns US$120,000; the company buys US$80,000 of reagents and test chips consumed in trials and a US$50,000 analyser; a US contract laboratory is paid US$200,000 for assay development under an agreement signed before the work, with Fenwick owning the results; cloud compute for data analysis costs US$25,000.
| Item | Rule | QRE |
|---|---|---|
| Three scientists, 90% qualified services | Substantially all: 100% of wages | US$450,000 |
| Laboratory manager, 40% direct supervision | Apportioned | US$48,000 |
| Reagents and test chips | Supplies | US$80,000 |
| Analyser | Depreciable property, excluded | 0 |
| Contract laboratory | 65% of US$200,000 | US$130,000 |
| Cloud compute | Right to use computers | US$25,000 |
| Total QREs | US$733,000 |
Common questions
Do stock options count as wages? To the extent they are included in wages subject to withholding when exercised, yes; the timing follows the withholding rules.
Can owners' wages count? For self-employed individuals and owner-employees, earned income replaces wages, subject to the same qualified services test.
What about overseas contractors? Excluded: research performed outside the United States does not count whoever performs it.
Do we have to claim every cost? No. A claim is stronger for leaving out costs that cannot be evidenced.
Related pages
- Eligible expenditure: the practical walkthrough
- How QREs become a credit
- Contracts, risk and rights
- Guide: staff costs and apportionment
- Guide: contractors and subcontracted R&D
Official sources
Educational content only, not tax advice. See the disclaimer.