Breaking Down Qualified Research Expenses for the R&D Tax Credit

Qualified Research Expenses

When claiming the R&D Tax Credit under IRC §41, identifying and classifying Qualified Research Expenses (QREs) correctly is the foundation of a compliant and defensible credit claim.
QREs include specific categories of costs that directly support qualified research activities — wages, supplies, and computer rentals. Misclassifying or omitting any of these can lead to underclaimed credits or IRS disputes.

Relevant Tax Codes and Forms

• IRC §41(b): Defines Qualified Research Expenses (QREs).
• IRC §41(d): Describes what qualifies as “qualified research.”
• Form 6765, Part I and II: Used to report QREs under both Regular and ASC methods.

Step 1: Wages — The Largest QRE Category

Under IRC §41(b)(2)(A), wages include amounts paid to employees directly performing, supervising, or supporting qualified research.

Qualified Wage Activities Include:

1. Direct research and experimentation.
2. Technical supervision of research teams.
3. Data collection, prototype design, and software development.

Wages Do Not Include:

• General administration, HR, or accounting.
• Non-technical project management.

Example:
Engineer Sarah earns $100,000 annually, spending 80% of her time on experimental design and testing.

Qualified Wage: 80% × $100,000 = $80,000 QRE

Claimable QRE = $80,000

Step 2: Supplies — Tangible Property Used in Research

Per IRC §41(b)(2)(C), supplies are non-depreciable tangible property used in qualified research. These include raw materials, prototypes, and test components.

Examples of Qualifying Supplies:

• Circuit boards for prototypes.
• Chemicals or reagents used in lab tests.
• Materials consumed during trial production runs.

Non-Qualifying Items:

• Depreciable assets (machinery, computers).
• General office supplies or furniture.

Example:
A biotech firm uses $50,000 worth of reagents and components for testing.
Claimable QRE = $50,000

Step 3: Computer Rentals and Cloud Computing

IRC §41(b)(2)(A)(iii) allows computer rental costs and cloud computing expenses to qualify when directly used in development or testing.

Qualifying Examples:

• Cloud-based simulation platforms.
• Rented server space for data processing.
• Software environments for product modeling or testing.

Non-Qualifying Examples:

• General IT maintenance.
• Email, hosting, or administrative use.

Example:
A software company rents cloud servers for $20,000 to train AI algorithms.
Claimable QRE = $20,000

Step 4: Contract Research vs. Internal QREs

While wages, supplies, and rentals are 100% qualified, contract research typically qualifies at 65% unless performed by universities or consortia (as defined in IRC §41(b)(3)).
Ensure these are not double-counted in both internal and external QRE categories.

Step 5: Documentation Requirements

For each QRE type, maintain:

• Payroll summaries and time allocation logs (for wages).
• Invoices, receipts, and inventory records (for supplies).
• Cloud service bills or computing contracts (for rentals).
• Experiment logs or engineering reports connecting the cost to qualified research.

Retention: Minimum 4 years after filing the return.

Step 6: Common IRS Challenges

• Claiming administrative wages as research labor.
• Including capitalized or depreciable items as supplies.
• Failing to document how cloud expenses relate to qualified research.
• Mixing foreign and U.S. expenses — only U.S.-based research qualifies.

Conclusion

Accurately identifying Qualified Research Expenses is critical to maximizing your R&D credit and surviving IRS scrutiny.
By classifying wages, supplies, and computer rentals correctly under IRC §41(b), businesses can ensure strong compliance and higher credit outcomes for the 2025 tax year.

Call to Action

For professional help identifying and documenting Qualified Research Expenses, consult Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant, Enrolled Agent admitted to practice before the IRS, and a cross-border tax expert assisting American and Indian businesses in R&D and IRS compliance.

Disclaimer

This article is for informational purposes only and should not be considered tax or legal advice. Always consult a licensed CPA before filing or claiming credits.

Top 5 FAQs

1. What are Qualified Research Expenses?
   They are costs directly related to research activities, such as wages, supplies, and computing.
2. Can bonuses be included in wages?
   Yes, if the bonus relates to qualified research performance.
3. Are prototype materials QREs?
   Yes, if used in research and not capitalized as assets.
4. Do foreign research expenses qualify?
   No, only research conducted within the U.S. is eligible.
5. Are leased servers or cloud costs eligible?
   Yes, if they directly support qualified research.

About Our CPA

Anshul Goyal, CPA EA FCA is a Certified Public Accountant in the U.S., Enrolled Agent authorized to practice before the IRS, and a cross-border tax specialist assisting American and Indian businesses in R&D tax credits, compliance, and IRS representation.