Qualified research expenses

QREs fall into four kinds, set out in Section 41(b), and a cost outside them never counts. Wages count when they are paid to employees who do qualified research, or who directly supervise or support it. An employee’s wages count in proportion to time spent on qualified work, and in full once that share reaches 80%. Supplies count when they are tangible items used in the research, other than land and depreciable property. Rent for someone else’s computers counts if the owner runs them off the business’s premises and the business is not their main user. Payments to outside contractors for qualified research count at 65% of the amount paid.

Where and how the work is done also matters. Research outside the United States and its territories never counts, whoever does it. Contract research counts only if the business agreed to it before the work began. Its payment also cannot depend on the research succeeding. Cloud computing may count on the computer rental terms when used in the research itself, but not for hosting a released product.

A startup that has not begun business yet can still count its in-house research costs. It must plan to use the results in its own business. Contract research paid for before the business begins does not count.

QREs are a narrower set than the research costs a business deducts under Section 174A. Patent costs and depreciation on research equipment are Section 174A costs, and they are never QREs. QREs also leave out office rent, overhead and most utilities.