Qualified R&D Expenses
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      1. TaxTaker Knowledge Base
      2. R&D Tax Credit
      3. Qualified R&D Expenses

      What are Qualified Research Expenses (QREs)?

      Explanation of Expenses That Will Qualify for the R&D Tax Credit

      Qualified Research Expenses (or QREs) are amounts that are paid or incurred by a business that are used to conduct “qualified research” as defined by the IRS. 

      There are a few main buckets of expenses that most qualified expenses would fall under:

      • Qualified Labor Expenses
      • Qualified Supply Expenses
      • Qualified Contract Research Expenses
      • Qualified Cloud Expenses

       

      Qualified Labor Expenses are any wages that are paid to an employee for “qualified services” performed by that employee. In other words, any wages that are paid to an employee for their time spent on R&D related activities throughout the fiscal year can be considered as a qualified research expense. 

       

      Furthermore, the IRS defines a “qualified service” as an individual who:

      1. Engages in qualified research
      2. Directly supervises qualified research
      3. Directly supports qualified research
       

      For example - A business hires a W2, US based software engineer to help develop their product. It is likely that at least some of their wages (or salary) would count as Qualified Labor Expenses. 

       

      Qualified Supply Expenses are expenses used to conduct qualified research. Per IRS guidelines, these supplies must fit into the following criteria:

      1. Must be tangible property (other than land or improvements to land)
      2. The supply must be subject to depreciation 
       

      For example, these supplies would qualify:

      • Materials for prototyping* (ie. 3D printer Filament)
      • Lab Supplies (as long as they are not used for production)
       

      These supplies would not qualify:

      • Land or Improvements to land
      • Non-tangible expenses (license, leases, rental costs, travel expenses, etc.)
      • Supplies used for general & administrative purposes
       

      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.

       

      Qualified Cloud Expenses are expenses used to conduct qualified research. Per IRS guidelines, these supplies must fit into the following criteria:

      1. The servers rented must be in the US (ex. AWS, GCP, Microsoft Azure)
      2. The servers must not be located on the company’s premises
      3. Your company must be the primary user for the servers that are rented

       

      For example - If a software developer uses their cloud environment to perform their development work & also performs their beta testing of their pre-released software programs, the expense related to these activities would likely qualify as a qualified research expense.