What Are Qualified Research Expenses (QREs)?

Qualified research expenses, or QREs, are the costs the federal R&D tax credit is computed on. They are defined in IRC section 41(b) and Treas. Reg. 1.41-2: research wages, supplies, certain computer rental and a percentage of contract research. Everything else a research program costs, from the building to the equipment, sits outside the credit even when it is essential to the work. Two other pieces of the credit, basic research payments and payments to an energy research consortium, are computed separately under section 41(a)(2) and (3).

This guide covers what goes into each category, what never does, and how QREs are reported on Form 6765. What happens to the total next, the 14% simplified credit or the 20% regular credit, is in how to calculate the R&D tax credit; which work qualifies in the first place is in the requirements guide.

The QRE categories and where each one is reported

Every category shares two conditions. The cost must be tied to qualified research, meaning work that passes the four-part test and escapes the exclusions, and it must be paid or incurred in carrying on a trade or business. Treas. Reg. 1.41-2(a) gives that phrase the same meaning it has for ordinary business deductions under section 162, and adds that research must relate to a business being carried on when the cost is paid. A start-up gets one concession in section 41(b)(4): its in-house research expenses count if its principal purpose is to use the results in a future active business. The concession covers in-house expenses only, not contract research. The regulation also denies contract research treatment when the results are meant to be licensed out for royalties and the company does not use them in its own business.

R&D credit qualified wages

Three rules decide how much of a person’s pay counts as a QRE.

1. The wage definition

Section 41(b)(2)(D) uses the income tax withholding definition of wages in section 3401(a). The IRS audit guide on QREs puts it in payroll terms: all taxable wages reported on Form W-2, including bonuses and stock option redemptions, but not amounts that are not subject to withholding, such as certain fringe benefits. Two adjustments follow from the statute. Wages taken into account for the work opportunity credit are removed. And for a self-employed person, section 41(b)(2)(D)(ii) counts earned income under section 401(c)(2), which starts from net earnings from self-employment, so a sole proprietor or partner who does the research personally is not shut out for lacking a W-2.

2. Which services count

Only qualified services count: engaging in qualified research, directly supervising it, or directly supporting it. Supervision means first-line management only, and support excludes general administrative work; the requirements guide lists the regulation’s examples for each role. The audit guide adds a caution worth building records around: qualification turns on what an employee actually did during the year, not on a job description or title.

3. Allocation and the 80% rule

When someone does both qualified and other work, Treas. Reg. 1.41-2(d)(1) counts the share of their wages equal to time spent on qualified services over time spent on all services, unless another method can be shown to be more appropriate. The audit guide notes that leave such as sick time stays out of that fraction. Then comes the 80% rule in section 41(b)(2)(B) and Treas. Reg. 1.41-2(d)(2): if the wages allocated to qualified services reach 80% of the person’s wages for the year, all of their wages count. The same allocation basis must be used for both steps, and this rule is separate from the 80% process of experimentation requirement that each business component must meet.

Engineer 1 counts in full because 90% clears the 80% line; at 75% the same engineer would contribute $105,000. The vice president may be the most senior technical person in the company, but supervision above the first line is not a qualified service, so that salary counts only for time the vice president spends doing research or acting as the immediate supervisor of people who do it. The company reports $212,000 in column 50, $68,000 in column 51 and $65,000 in column 52 of Section G, for $345,000 of wage QREs out of $790,000 of W-2 pay.

Two more wage points appear on the form. Section E, line 38 asks for the officers’ wages included in the wage total; the Form 6765 instructions note that officers’ pay is generally wages and that being a shareholder does not change the reporting. And for someone who works partly outside the United States, in-house costs are apportioned and only the U.S. share counts, unless the costs are wages and the 80% rule applies (Treas. Reg. 1.41-4(c)(7)(ii)). When BEG runs a client’s payroll through Managed Payroll, from $25 per employee per month, the W-2 figures this schedule starts from are already in one system.

Supplies

A supply is tangible property other than land, improvements to land, and property of a character subject to depreciation (section 41(b)(2)(C)). It counts when it is used in performing qualified services, by an employee or someone acting like one, under Treas. Reg. 1.41-2(b)(1), and the same paragraph rules out supplies that are indirect research expenditures or general and administrative expenses. Prototype materials consumed in testing, test samples and chemicals used up in experiments fit the definition. A test rig the company keeps does not, because it is depreciable however it is booked.

Utilities are the classic trap. Electricity, water and gas for the building where research happens are general and administrative expenses. Only additional, extraordinary utility costs that the special character of the research requires, the regulation’s example being power for high-energy equipment such as laser or nuclear research, can be treated as supplies, and the taxpayer has to establish them. The IRS research credit issues guide tells examiners that comparing electricity use per square foot between an office building and a research facility is not enough. The QRE chapter of the same guide says supply QREs “in general, should represent a small portion of total QREs,” and that large supply claims should prompt a look for capital or other ineligible costs.

Computer rental

Section 41(b)(2)(A)(iii) adds amounts paid to another person for the right to use computers in the conduct of qualified research. Treas. Reg. 1.41-2(b)(4) limits it to time-sharing: the computer must be owned and operated by someone else, located off your premises, and not have you as its primary user. The amount is reduced by anything you or your controlled group receive for letting others use substantially identical property. Outside that one exception, paying to use personal property is not a QRE at all, so leases of lab equipment or vehicles do not count. How the rule applies to cloud services is covered in the software guide.

Contract research expenses

Payments to anyone other than an employee count at 65% under section 41(b)(3)(A) and Treas. Reg. 1.41-2(e)(1), for two kinds of work: qualified research itself, or services that would be qualified services if your own employees performed them. Under Treas. Reg. 1.41-2(e) the payment must be made under an agreement entered into before the work, the work must be performed on your behalf (meaning you have a right to the results, though not necessarily an exclusive one), and you must bear the cost even if the research fails. When a contract mixes research with other services, only 65% of the research portion counts.

The regulation’s examples, stated in its own units, answer these questions:

• Cost-plus contracts. A company reimburses a contractor’s $200x of costs (labor, supplies, depreciation on the contractor’s equipment and overhead) plus a $100x fee, all owed regardless of outcome. It counts 65% of the full $300x, or $195x, even though some of the contractor’s costs would not be QREs if incurred in-house (Example 3).
• Success fees. If the $100x is payable only if the research succeeds, only 65% of the $200x counts, or $130x (Example 4).
• Support services. A temporary secretary who spends a week typing reports on research results, billed at $400 by a staffing firm, produces $260 of contract research because that work would be direct support if an employee did it (Example 6). An outside accountant keeping the project’s books produces none (Example 7).
• Prepaid work. A payment for research to be performed after year-end counts in the year the research is actually performed (section 41(b)(3)(B); Example 2).

Higher percentages apply in two cases. Amounts paid to a qualified research consortium, a tax-exempt 501(c)(3) or 501(c)(6) organization operated primarily to conduct scientific research that is not a private foundation, doing research for you and at least one unrelated taxpayer, count at 75%. Amounts paid for energy research to an eligible small business (500 or fewer employees in either of the two preceding calendar years, and less than 50% owned by you), a university or a federal laboratory count at 100% (section 41(b)(3)(C), (D)). Research performed abroad never counts, and for a contract performed partly abroad only 65% of the U.S. portion does. The contractor’s side of the same arrangement is governed by the funded research rules; if you are the one being paid to do research, start with the requirements guide.

What never counts as a qualified research expense

Some of those costs still count as research spending for the deduction. Section 174A counts depreciation on research property and every dollar of software development as research or experimental expenditures, deductible for domestic work in tax years beginning after 2024. QREs are a narrower set within that spending, so the two totals should not be expected to match. The section 174 guide covers the deduction.

Putting the illustration together

The hypothetical company’s QREs for its one business component come to $467,000: $345,000 of wages, $18,000 of prototype materials used up in testing, no computer rental because its servers are its own, and $104,000 of contract research. A $30,000 test fixture it bought is depreciable and a $6,000 software license is not tangible property, so neither is a supply. On Form 6765 those amounts land on lines 42, 43 and 45, total $467,000 on line 48, and, if Section G applies, appear in columns 53, 54 and 56 for the component. Turning $467,000 into a credit is the calculation guide’s job, and the R&D tax credit calculator runs the simplified method on your own figures.

How QREs tie to business components on Form 6765

Form 6765 collects QREs twice. Section F totals them by category on lines 42 to 48, and line 48 carries to line 5 for the regular credit or line 20 for the simplified credit. Section G breaks the same dollars out by business component. For tax years beginning before 2026 Section G is optional; for later years it is required unless you are a qualified small business electing the payroll credit, or your QREs are $1.5 million or less, your average gross receipts are $50 million or less and you are filing an original return. When it applies, you list the components that make up at least 80% of total QREs, up to 50 of them, largest first, and report the rest on one aggregate line.

Section E asks two more questions about QREs: line 38 for officers’ wages, and line 40 for any new category of expense included this year. The instructions say a new or recharacterized category must also be included, and adjusted, in the base years used to compute the credit. Keeping QREs by business component from the start is what makes all of this possible later; the documentation checklist lists the payroll, invoice and contract records behind each column. Companies that never counted these costs in earlier open years may be able to claim them by amendment through Tax Planning. Qualified small businesses can elect, by the due date of the original return, to apply the current year’s credit against payroll tax through Payroll Credits.

Sources: 26 U.S.C. 41; 26 U.S.C. 401(c), earned income; 26 U.S.C. 174A; Treas. Reg. 1.41-2, qualified research expenses (eCFR); Treas. Reg. 1.41-4, foreign research apportionment (eCFR); IRS, Form 6765 (Rev. December 2024); IRS, Instructions for Form 6765 (Rev. December 2025); IRS, Audit Techniques Guide: Qualified research expenses; IRS, Audit Techniques Guide: Research credit issues. Rules, percentages, form lines and examples checked against these sources on September 25, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.