# 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.

Source: https://lopifi.com/learn/what-counts-as-qualified-research-expenses
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What counts as qualified research expenses for the R&D credit?** 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](https://lopifi.com/md/glossary/qualified-research-expenses), QREs. There are four kinds, and most of a software startup's claim is the first.

| Kind | What counts | What doesn't |
| --- | --- | --- |
| Wages | §3401(a) wages for doing, directly supervising or directly supporting qualified research | Wages of people who only manage at a higher level, or who support the business generally |
| Supplies | Tangible things used up in the research | Land, and property that's depreciated |
| Computer rental | Computers off your premises that someone else operates | Your own servers and laptops |
| [Contract research](https://lopifi.com/md/glossary/contract-research-expenses) | 65% of what you pay a non-employee for qualified research on your behalf | Work abroad, or work you only pay for if it succeeds |

The four kinds of QRE, §41(b).

— [IRC §41(b)(2)](https://www.law.cornell.edu/uscode/text/26/41), In-house research expenses: wages for qualified services, supplies, computer rental

## 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.

> “Direct supervision does not include supervision by a higher-level manager to whom first-line managers report, even if that manager is a qualified research scientist.”

— [Instructions for Form 6765 (Rev. December 2025), Section G, column 51](https://www.irs.gov/pub/irs-pdf/i6765.pdf) (PDF), Doing, directly supervising and directly supporting research

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.

> “Services meeting the requirements of section 41(b)(2)(B) (i) or (ii) constitute substantially all of the services performed by the employee during a taxable year only if the wages allocated (on the basis used for purposes of paragraph (d)(1) of this section) to services meeting the requirements of section 41(b)(2)(B) (i) or (ii) constitute at least 80 percent of the wages paid to or incurred by the taxpayer for the employee during the taxable year.”

— [Treas. Reg. §1.41-2(d)(2)](https://www.law.cornell.edu/cfr/text/26/1.41-2), Wages: all of them, once research is substantially all of the job

| Line | Paid | Share | Counts |
| --- | --- | --- | --- |
| Lead engineer | $132,000 | 90%, so all of it | $132,000 |
| Engineer | $108,000 | 70% | $75,600 |
| Founder and CEO (an officer), first-line supervisor of the engineers | $90,000 | 20% | $18,000 |
| Warehouse lead, logging the results of the matching trials | $42,000 | 10% | $4,200 |
| Supplies used up in the trials | $2,400 | All | $2,400 |
| US contract research | $30,000 | 65% | $19,500 |
| Total QREs (Form 6765, line 48) |  |  | $251,700 |

Northwind's hypothetical 2027 QREs for StockMatch.

**Exercise — Count the qualified research expenses.** Fill in the last column for Northwind's hypothetical StockMatch year. Two rules decide most of it. A person who spends 80% or more of the year on qualified research counts in full; below that, only the share. Contract research counts at 65%. Type it in the workbook at https://lopifi.com/playground.

> **The founder's own salary.** A founder who directly supervises the engineers is doing qualified services for that share of the year: here $18,000. Form 6765 asks separately, on line 38, how much of the wage QREs are officers' wages, so the share should be one the time records support.

## 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.

> “An expense is paid or incurred for the performance of qualified research only to the extent that it is paid or incurred pursuant to an agreement that— (i) Is entered into prior to the performance of the qualified research, (ii) Provides that research be performed on behalf of the taxpayer, and (iii) Requires the taxpayer to bear the expense even if the research is not successful.”

— [Treas. Reg. §1.41-2(e)(2)](https://www.law.cornell.edu/cfr/text/26/1.41-2), When a contractor's research is yours

**Scenario — The developer abroad.** Northwind also pays $20,000 to a developer working abroad. None of it is a QRE: research outside the US is excluded. It still matters for tax, because Section 174 spreads it over 15 years ([Section 174A and foreign research](https://lopifi.com/md/learn/section-174a-and-the-rd-credit)).

*[Figure: rd credit]*

The same 2027 figures, in the still: wages, supplies and 65% of the contract feed the credit.

**In-house, from your own records**
- Pro: The people who did the work describe it
- Pro: Costs time, not fees
- Con: Someone has to learn the four-part test and the exclusions
- Con: Errors are yours to find
- Best for: A small team with one or two business components

**A credit-study provider or your CPA**
- Pro: Specialists who know the rules and the form
- Pro: A second reader before the IRS is one
- Con: A fee
- Con: 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

Who works out the QREs.

> **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

- [IRC §41(b)(2)](https://www.law.cornell.edu/uscode/text/26/41) — In-house research expenses: wages for qualified services, supplies, computer rental (statute)
- [IRC §41(b)(3)(A)](https://www.law.cornell.edu/uscode/text/26/41) — Contract research counts at 65% (statute)
- [Instructions for Form 6765 (Rev. December 2025), Section G, column 51](https://www.irs.gov/pub/irs-pdf/i6765.pdf) (PDF) — Doing, directly supervising and directly supporting research (irs)
- [Treas. Reg. §1.41-2(d)(2)](https://www.law.cornell.edu/cfr/text/26/1.41-2) — Wages: all of them, once research is substantially all of the job (regulation)
- [Treas. Reg. §1.41-2(e)(2)](https://www.law.cornell.edu/cfr/text/26/1.41-2) — When a contractor's research is yours (regulation)

## Read further

- https://lopifi.com/md/startups/rd-tax-credit-and-section-174
- https://lopifi.com/md/startups/contractor-vs-employee
- https://lopifi.com/md/accounting/rd-tax-credit

- **Track:** [R&D tax credit](https://lopifi.com/md/learn/rd-credit)
- **Lesson:** Lesson 3 of 9 — 12 min
- **Terms taught:** [Qualified research expenses](https://lopifi.com/md/glossary/qualified-research-expenses), [Contract research expenses](https://lopifi.com/md/glossary/contract-research-expenses), [Research credit](https://lopifi.com/md/glossary/research-credit)
- **Previous:** [What's excluded from the credit, R&D credit · Lesson 2](https://lopifi.com/md/learn/four-part-test-qualified-research/excluded-activities)
- **Next:** [Computing the credit: the ASC and the regular method, R&D credit · Lesson 4](https://lopifi.com/md/learn/how-to-calculate-the-rd-credit)
- **The course:** https://lopifi.com/md/learn