Research funded by a third party in which financial risk is not borne by the taxpayer, and/or substantial rights are not retained in the research. With regards to financial risk, generally speaking as a payee the taxpayer must bear financial risk through a fixed-fee type contract or a success-based fee to claim the R&D credit. Cost plus and time and materials contracts will generally not qualify for inclusion in the R&D credit of the payee.
The reverse is true for a payor. In general, as a payor the taxpayer must bear financial risk through a time and materials/hourly type contract. A fixed-fee type contract or a success-based fee will generally not qualify for the R&D credit.