Qualified research expenses: wages, supplies and contractors
Wages for qualified services, supplies, rented computers and 65% of contract research, worked line by line for one hypothetical year.
The credit is computed on qualified research expenses, QREs. There are four kinds, and most of a software startup's claim is the first.
Wages: whose, and how much
Three kinds of work earn wages a place in the claim. Doing the research. Directly supervising it, which means first-line management. Directly supporting it, like a clerk compiling research data. Payroll staff paying the engineers don't count, and neither does a manager two levels up.
Wages are counted by the share of time spent on qualified services, with one rule that matters: once that share reaches 80%, all of the person's wages count.
Contract research: when it's yours
The $30,000 paid to a US firm counts at 65%, $19,500, because three things are in the agreement: it was signed before the work, the work is on Northwind's behalf, and Northwind pays even if the prototype fails. Pay only on success and you've bought a result, not research.
In-house, from your own records
- Good at
- The people who did the work describe it
- Costs time, not fees
- Watch for
- Someone has to learn the four-part test and the exclusions
- Errors are yours to find
- Best for
- A small team with one or two business components
A credit-study provider or your CPA
- Good at
- Specialists who know the rules and the form
- A second reader before the IRS is one
- Watch for
- A fee
- Still needs your records: a study built after year end is only as good as what was written down during it
- Best for
- Several business components, contractors, or a first claim
Wages count by the share of time on qualified research, all of them from 80%. Contract research counts at 65%.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- Federal statute
- IRC §41(b)(2) (opens in a new tab)In-house research expenses: wages for qualified services, supplies, computer rentalFree to read
- IRC §41(b)(3)(A) (opens in a new tab)Contract research counts at 65%Free to read
- Federal regulation
- Treas. Reg. §1.41-2(d)(2) (opens in a new tab)Wages: all of them, once research is substantially all of the jobFree to read
- Treas. Reg. §1.41-2(e)(2) (opens in a new tab)When a contractor's research is yoursFree to read
- IRS guidance
- Instructions for Form 6765 (Rev. December 2025), Section G, column 51 (opens in a new tab)Doing, directly supervising and directly supporting researchPDF · Free to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Qualified research expensesWhat the credit is computed on: wages for qualified services — doing, directly supervising or directly supporting qualified research (all of a person's wages once that is 80% or more of them) — plus supplies used in the research, rented off-site computers, and 65% of contract research paid to others
- Contract research expenses65% of amounts paid to a non-employee for qualified research performed on the taxpayer's behalf under an agreement made before the work, where the taxpayer bears the cost even if the research fails; 75% for a qualified research consortium
- Research creditA federal general business credit for qualified research expenses — computed on Form 6765 by the regular method or the alternative simplified credit, used against income tax, carried back one year and forward twenty when unused, or, for a qualified small business, elected against payroll tax
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- The R&D tax credit and Section 174A for startupsEngineering salaries can earn a federal R&D credit against payroll tax, and Section 174A lets you deduct US research again. What qualifies, what to track.
- Contractor or employee? Classification for startupsContractor or employee depends on control, not the contract. The IRS test, state rules, 1099s, payroll registration and the cost of getting it wrong.