Qualified Research Expenses (QREs)

Qualified Research Expenses are the costs used in the Section 41 research-credit calculation. The statute divides them into in-house research expenses and contract research expenses. In-house expenses include wages for qualified services, supplies used in qualified research, and qualifying amounts paid for the right to use computers in qualified research.

The activity and expense tests work together. A cost category does not become a QRE unless it is tied to qualified research, and an activity that meets the four-part test does not turn every connected business expense into a QRE.

Section 41 uses the Section 3401(a) wage definition and limits the amount to wages paid for qualified services. Those services are:

• Performing qualified research
• Directly supervising qualified research, generally immediate or first-line supervision
• Directly supporting the people performing or directly supervising qualified research

General management, administration, and services that only indirectly benefit research are not direct supervision or direct support. Allocate wages from evidence of what the employee actually did during the period, not from a title alone. If less than substantially all of an employee's services were qualified services, use the supported actual portion rather than assuming a round percentage.

Supplies generally means tangible property used in qualified research, other than land, improvements to land, and depreciable property. A software business may have prototype material or hardware consumed during testing, but ordinary capital equipment is not converted into a supply QRE merely because engineers use it.

Keep invoices, the date and project, how the property was used, and whether it was consumed or remains a depreciable asset.

Section 41 separately includes qualifying amounts paid or incurred to another person for the right to use computers in the conduct of qualified research, subject to the governing regulations. Cloud hosting, managed services, developer tools, and software subscriptions are not automatically computer-use QREs.

Review the contract, service provided, allocation, and actual research use. A cost that does not fit this credit category may still require separate Section 174A expense-treatment analysis.

The ordinary Section 41 rule includes 65% of amounts paid or incurred to a non-employee for qualified research, with separate statutory percentages for certain qualified organizations and other special cases.

The percentage is only one part of the analysis. The research must be performed on the taxpayer's behalf, the taxpayer generally must bear the expense even if the research is unsuccessful, and the rights and funding terms matter. Keep the agreement, statements of work, invoices, payment evidence, work location, deliverables, and project records. Purchasing finished software or paying for routine implementation does not create contract-research QREs.

A reviewable QRE schedule should show:

• The business component and qualified-research analysis
• Each person, the relevant Section 3401 wage basis, services performed, period, and supported allocation
• Each supply or computer-use cost, invoice, use, allocation, and project connection
• Each contractor, agreement terms, payment, work location, and ordinary or special inclusion percentage
• Excluded and unresolved items, with the reason they were not included

The current Form 6765 instructions require the totals and, when Section G applies, business-component reporting. QuarryFi can prepare candidate schedules and evidence links for review; the taxpayer and tax professional determine the filed QRE amount.