What is a Qualified Research Expense?

By September 7, 2016 R&D Tax Credits

The IRS defines Qualified Research Expenses (QREs) as the sum of “in-house research expenses” and “contract research expenses”. Those in-house research expenses include

  1. Wages: Taxable or subject to self-employment tax of individuals performing, directly supervising or supporting the qualified research.
  2. Supplies: Amount paid or incurred for materials used in the conduct of qualified research.
  3. Contract Research: Payments for the conduct of research. The taxpayer must be at risk when conducting the research.


Wages are often the largest component of the qualified research expense in an R&D tax credit study. Wages will constitute as an “in-house research” expense if employees were paid for “qualified services”. Wages mean all taxable wages as reported on a W2 form. It also includes bonuses, stock option redemption and any wages subject to withholding.

The IRS defines three types of “qualified services” as:

  1. Engaging in qualified research: An employee has to conduct actual qualified research.
  2. Directly supervising qualified research: An employee who has immediate supervision of qualified research.
  3. Directly supporting qualified research: An employee who directly supports or directly supervises persons conducting qualified research.

If 80% or more of an employee’s responsibilities are considered “qualified services” then the “Substantially All Rule” applies.


Supplies are any materials used to conduct qualified research. Supplies are used to conduct qualified research if they are used by employees while conducting “qualified services”. The supply must be directly related to the “qualified services” conducted by the employee.

Supplies can be any tangible property except for land or depreciable property. The supplies can be consumed or destroyed during the qualified research and still be considered as supplies for calculation purposes.

Contract Research

The IRS defines a contract research expense as 65% of any expense paid for the performance of qualified research on behalf of the taxpayer. The IRS provides a three-part test which determines what is considered a contract research expense. The contract research agreement with a third party:

  1. Must be agreed on prior to the performance of the qualified research.
  2. States that the research is being performed on the taxpayer’s behalf.
  3. Requires the taxpayer to bear the expense of any risk involved with the research.

Think your company’s expenses meet the qualified research expense requirements? Send us an email to hello@indagotax.com or visit www.indagotax.com to learn more about the Research and Development Tax Credit.