8 August 2024

Qualified Research Expenses (also known as QREs) are central to Research and Development (R&D) Tax Credit: they are what can be claimed as a useful expense to obtain the benefit in the US.  

Although, many businesses end up getting confused about what counts as a qualified expense and what doesn’t. That’s why it’s important to be aware of and up to date with the definitions established by the rules of the Internal Revenue Service (IRS). 

Wages  

Workers involved in R&D activities may be eligible only if the worker provides an “eligible service” according to the research activities involved, such as: 

  • Conduct, execute qualified research. 
  • Directly support, or directly supervise qualified research. 

Only time attributable to these specific activities may be claimed as part of the credit, and employers must provide documentation that includes at least one of the following: 

  • Employee Form W-2s 
  • Payroll records 
  • Time tracking data. 
  • Time questionnaires 
  • Oral testimony 
  • Meeting minutes 

It’s important to highlight that the contribution must be direct, that is, employees who provide administrative services are not counted, even if they are also members of the research department. 

Supply Expenses 

The Section 41 of the Internal Revenue Code (IRC) defines supply expenses as tangible assets used to conduct research activities that have not been capitalized or depreciated, such as raw materials used to manufacture and test prototypes. 

Contract Research Expenses  

Sometimes, the lack of facilities or specific knowledge may create the need to hire a third-party company to conduct research activities. 

In these cases, 65% of the amounts paid to taxpayers to carry out the research work can be declared and recovered through R&D credit, (up to 75% if it is carried out by a “qualified research consortium”) and a formal agreement with the third-party contractor is established to claim contract research expenses. The taxpayers must retain the rights to the results of the investigation, also bearing the economic risk.  

For expenses to be qualified, the contract must meet certain criteria: 

  • Must be entered before conducting qualified research. 
  • Must provide for the investigation to be carried out on behalf of the taxpayer. 
  • The taxpayer must bear the costs of the research, even if there is no success. 

What Does Not Qualify? 

Some projects that require research may not qualify your company for the R&D Tax Credit: duplicating a project your company has previously completed, for example, reviewing the effectiveness of management and administrative functions, or conducting activities outside the country may not make your company eligible, and your project’s completion status and financing may also affect eligibility. 

QREs also do not include:  

  • Any funded research costs 
  • Acquisition and improvement of land used in research. 
  • Commercial production costs 
  • Advertising and promotional expenses 
  • General management and administrative functions, including supervisory functions not related to R&D. 
  • HR and personnel duties, including recruitment. 
  • Accounting duties, including bookkeeping, payroll, and budgeting 
  • Customer Service 
  • Employee training, including conference attendance. 
  • Charitable fundraising 

How Can We Help You? 

Our R&D tax credit company specializes in helping companies finance innovation and secure funding for their Research and Development (R&D) activities through the comprehensive management of R&D Tax Credits. With more than 1,800 qualified employees, counting on specialists from different fields, we are committed to supporting companies of all sizes and in all sectors of activities. With our expertise, FI Group specialists can support your company in identifying qualified activities. 

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