What Are Qualified Research Expenditures (QREs)?

Companies already claiming the R&D tax credit know that this benefit provides a substantial amount of capital and cash flow to their business every year. However, even for business owners who have been claiming the credit for years, the fine details of calculating the credit amount still escape them. Internal Revenue Code Section 41 lists the three main categories of costs that can qualify for the R&D tax credit, which include wages, supplies, and contractor expenses.


For many businesses claiming the R&D tax credit, the largest category of expenses that qualify include the costs of “any wages paid or incurred to an employee for qualified services.” The definition is very broad, but, as an example, an engineer performing iterative calculations to arrive at a final design for a project would fall under this category. This means if he spends 20 percent of his total work time performing iterative calculations, then 20 percent of his salary would be considered a qualified research expense. A myriad of activities that an engineer performs on a project can be considered qualified activity, provided they meet the four-part test.


For an item or material to qualify as a supply for the R&D tax credit, it must be any tangible property used in the conduct of qualified research other than land or improvements to land and property of a character subject to the allowance for depreciation. This broad definition can include many items, but cannot include indirect research expenses or general and administrative expenses. Most firms only offering services or in the construction industries typically do not have qualified supply expenditures, but firms in the manufacturing industry can take advantage of this category of expenses. Manufacturing companies that do trial manufacturing runs or develop product prototypes often use material that either becomes scrapped or a part of the final product. Companies can typically capture scrap material costs for these initial activities before commercial production, and the material cost can still be captured as well even if the finished good is ultimately sold to a customer.

Contractor Expenses

Contract research is best thought of as 65% of any amount paid or incurred to any person (outside of the business) for qualified research. The lack of stability in certain industries leads businesses to hire outside firms or contract employees to work augment or work alongside business employees. In other cases, some businesses offer service lines that do not require a full-time employee, and instead hire contractors to perform the work on an as-needed basis. Regardless of the exact reason why a business employs the contractor, if the contractors are performing qualified research, the business’s expenses for those contractors can qualify for the R&D tax credit. In most situations, the contractor must be paid on a time and material or hourly basis.

The analysis of the three main categories of qualified research expenses are the core of an R&D tax credit study. It is possible for a business to contain all three categories or only one category of qualified research expenditures, and it largely depends upon the industry and type of work the business performs.