Contractor Expenses That Can Qualify For The R&D Tax Credit
Contract Research Expenses
Qualified Contract Research Expenses are expenses paid or incurred by a business to a 3rd party (ie. a 1099 contractor, US based contracting firm, a party other than an employee of the company. etc.) that conducts R&D qualified services on their behalf.
For example - If a business hires a 3rd party, US Based software developer to help them develop their iOS application, this would likely qualify as a qualified contract research expense.
Qualifications of Qualified Contract Expenses
Typically, for contract expenses to qualify as qualified research expenses, there must be an agreement between the company (or taxpayer) and the third party regarding the services that will be performed. Prior to performing the services, there must be an agreement that:
- is agreed upon prior to the performance of the qualified research
- must provide that the research be performed on behalf of the company (or tax payer) - this means that the taxpayer has the right to the research results, regardless if the research is an exclusive right or not
- must require the tax payer to bear the expense of the research, even if the research is not successful.
- If payment to the 3rd party is contingent on the success of the research, the IRS views this as an expense towards a product or a result instead of payment for a 3rd party conducting & performing research. If this is the case, this is not a qualified research expense since there is no risk involved in developing a new product or process.
Calculation of Qualified Contract Expenses
Payments made under the category of qualified contract expenses are treated slightly different from those of qualified labor & qualified supply expenses.
A contract research expense is 65% of any expense paid or incurred by a business to a 3rd party (ie. a 1099 contractor, US based contracting firm, a party other than an employee of the company. etc.) that conducts R&D qualified services on their behalf.
Example: If a business hires a 3rd party, US Based software developer (that spends 100% of their time on qualified research activities) to help them develop their iOS application and pays them $10,000 to do so, $6,500 of the total $10,000 (65% of $10,000) would be considered towards the company's qualified research expense total amount.