Qualified Research Expenses

Last reviewed October 12, 2026

The R&D tax credit is calculated as a percentage of your qualified research expenses (QREs). IRC Section 41(b) defines three categories of expenses that count.

1. In-house wages

W-2 wages paid to employees who perform, directly supervise, or directly support qualified research activities.

What counts:

• Wages for engineers, developers, scientists, and technicians performing qualifying research
• Wages for first-line supervisors who directly oversee qualified research activities
• Wages for employees who directly support qualified research (such as lab technicians or machinists preparing prototypes)
• The qualifying portion of wages for employees who split time between R&D and other duties

What does not count:

• Wages for employees who do not perform, supervise, or directly support qualified research
• Wages for indirect support (HR, accounting, general management) — even if the company as a whole conducts R&D
• 1099 contractor payments (these fall under a separate category with different rules)
• Benefits, bonuses paid in non-wage form, or equity compensation (only W-2 wages qualify)

Time allocation

When an employee spends only part of their time on qualified research, only that portion of wages is included as QRE. The allocation must be supportable — through timesheets, project records, calendars, or reasonable estimates documented contemporaneously.

2. Supplies

The cost of tangible property (other than land or depreciable property) used in the conduct of qualified research.

What counts:

• Raw materials consumed during prototyping or experimentation
• Components used in testing that are destroyed or rendered unusable
• Chemicals, reagents, and lab supplies consumed in experiments
• Materials used to build prototypes or test fixtures

What does not count:

• Capital equipment (depreciable property is excluded)
• Supplies used in production after the research phase is complete
• Office supplies and general overhead
• Materials that can be sold, used in production, or returned

The key word is consumed — the supplies must be used up or rendered valueless during the research process.

3. Contract research expenses

Payments to outside parties for qualified research performed on behalf of the taxpayer.

Under IRC Section 41(b)(3)(A), only a portion of contract research payments is included as QRE. The contractor must be performing work that meets the same four-part test, and the taxpayer must retain substantial rights to the results of the research.

What counts (at the reduced inclusion rate):

• Payments to engineering firms developing components or systems on your behalf
• Software development contracted to an outside firm where you retain the IP
• Laboratory testing performed by a third party under your direction
• Prototype fabrication contracted to a specialized vendor

What does not count:

• Payments for routine services (IT support, maintenance, general consulting)
• Payments where the contractor retains the rights to the research results
• Payments for research funded by a third party (see Common Disqualifiers)

What is not a QRE

Several categories of spending are explicitly excluded from QREs even if they relate to R&D:

• Overhead and indirect costs — rent, utilities, general administrative costs
• Capital equipment — machinery, computers, and other depreciable assets used in research (the depreciation itself does not qualify)
• Foreign research — research conducted outside the United States
• Funded research — research for which someone else bears the financial risk

How QREs become a credit

Your total QREs are used in one of two credit calculation methods — the Regular Research Credit or the Alternative Simplified Credit — each of which applies a different formula to determine your credit amount. When both methods may apply, the platform calculates each and lets you choose the one that produces the larger credit.

Frequently asked questions

What are qualified research expenses?

Qualified research expenses (QREs) are the costs directly tied to qualifying R&D activities under IRC Section 41(b). They include W-2 wages for employees performing or supervising qualified research, supplies consumed during research, and 65% of contract research payments to third parties.

Do contractor payments count as QREs?

Yes, but only 65% of payments to contractors performing qualified research on your behalf are included as QREs. The contractor must be performing work that meets the IRS four-part test.

Can overhead costs be included as QREs?

No. Overhead, general and administrative expenses, and indirect costs are not qualified research expenses. Only direct wages, supplies consumed in research, and qualified contract research payments count.