{"id":6879,"date":"2026-08-06T10:56:36","date_gmt":"2026-08-06T08:56:36","guid":{"rendered":"https:\/\/leyton.com\/us\/?post_type=article&#038;p=6879"},"modified":"2026-08-12T10:05:58","modified_gmt":"2026-08-12T08:05:58","slug":"a-refresher-on-qualified-research-expenses-for-the-rd-tax-credit","status":"publish","type":"article","link":"https:\/\/staging-leyton.majjane.agency\/us\/insights\/articles\/a-refresher-on-qualified-research-expenses-for-the-rd-tax-credit\/","title":{"rendered":"A Refresher on Qualified Research Expenses for the R&amp;D Tax Credit"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">The <strong><a href=\"https:\/\/leyton.com\/us\/rd-tax-credit\/\">Research and Development (R&amp;D) tax credit<\/a><\/strong> is a powerful benefit that many companies make use of each year. However, only certain expenses qualify for inclusion in the R&amp;D tax credit analysis and understanding what to include or exclude can be confusing for taxpayers.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">At the highest level, expenses that are includable in the R&amp;D Tax Credit analysis are expenses directly related to R&amp;D. Incidental or tangential expenses are not includable. The categories of expenses that are includable are:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Employee Wages, <\/li>\n\n\n\n<li>Contractor Costs, <\/li>\n\n\n\n<li>Supplies, <\/li>\n\n\n\n<li>Cloud Computing.<\/li>\n<\/ul>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 id=\"h-employee-wages-in-qualified-research-expenses-qres\" class=\"wp-block-heading\"><strong>Employee Wages in Qualified Research Expenses (QREs)<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Employee Wages<\/strong> are typically the largest and most common R&amp;D expenses includable in the credit. These are W-2, Box-1 employee wages. Box-1 wages include regular pay, tips, bonuses, taxable fringe benefits, and other compensation. Box-1 wages do not include pre-tax retirement contributions, pre-tax health insurance premiums, account contributions (HSA, FSA), or commuter benefits.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">There are three levels of qualified work done by employees that can be included in the credit: direct development, direct support, and direct oversight.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Direct development<\/strong> is work that is directly performed by an employee that is R&amp;D work, such as building a prototype or drawing a new design.<\/li>\n\n\n\n<li><strong>Direct support work<\/strong> is one level below that and is necessary work that directly supports development. Examples of this include roles that provide feedback to the employees performing direct development, notifying them of errors\/issues with what is being developed.<\/li>\n\n\n\n<li><strong>Direct oversight work<\/strong> is one level above direct development. A manager overseeing the development team and assisting with brainstorming solutions to issues or discussing different potential directions for development would fall into this category.<\/li>\n<\/ul>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">Employees who perform R&amp;D qualified activities are identified, and the portion of their wage that is related to R&amp;D is included in credit calculation as Qualified Research Expenses (QREs).<\/p>\n\n\n\n<h2 id=\"h-contractor-costs-and-specific-qre-caveats\" class=\"wp-block-heading\"><strong>Contractor Costs and Specific QRE Caveats<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Contractor Costs<\/strong> are the second most common R&amp;D expense includable in the credit. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">These costs can either be from 1099s or outside companies that are paid by invoice without a 1099; both are considered contractor costs. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Contractors who perform R&amp;D qualified activities are identified, and the portion of their payment that is related to R&amp;D is included in credit calculation as QREs. There are, however, some caveats to contractor qualification.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Contractor expenses includable in QREs are capped at 65% of the contractor expenses paid for R&amp;D efforts per tax regulations (26 U.S. Code \u00a7 41(b)(3)(A)). <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Additionally, the taxpayer must retain at least some rights to the development work of the contractors and must maintain some monetary risk in their work.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Rights: <\/strong>if the contractor is developing new designs or new IP, the taxpayer must retain substantial right to use the IP or designs.<\/li>\n\n\n\n<li><strong>Risk: <\/strong>the taxpayer must have some monetary risk in the work. If the taxpayer\u2019s payment to the contractor is contingent on the work being successful, then there may not be sufficient risk to include the contractor\u2019s payments. If the contractor is to be paid regardless of the result of the work, then the contractor\u2019s payments are likely includable.<\/li>\n<\/ul>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 id=\"h-when-supplies-count-as-qualified-research-expenses-qres\" class=\"wp-block-heading\"><strong>When Supplies Count as Qualified Research Expenses (QREs)<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Supplies costs<\/strong> may be a less common R&amp;D expense depending on the industry of the taxpayer. A machine shop that is machining prototypes out of metal will likely be able to include the cost of the raw metal for their credit. However, the pens and paper used by the office staff will not be includable.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Supply expenses are only includable in the credit calculation to the extent that the supplies are consumed or used up directly in the process of development efforts. This means normal supplies used in the course of production or office supplies that are used by the back office for general business administration are not includable. This also applies to tools and machines. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Only supplies that are \u2018used up\u2019 as part of the development efforts are includable, so tools or machines purchased, even if used to build prototypes or otherwise assist in development efforts, are not includable in the credit. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Capital, depreciable machinery &amp; equipment costs are also strictly prohibited from the credit calculation.<\/p>\n\n\n\n<h2 id=\"h-navigating-cloud-computing-expenses-in-qre-calculations\" class=\"wp-block-heading\"><strong>Navigating Cloud Computing Expenses in QRE Calculations<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Cloud Computing<\/strong> is the least common includable expense, depending on the industry of the taxpayer. In software development, cloud computing expenses are very common, whereas in architecture, such expenses are rare.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The R&amp;D credit rules were first developed in the 1980s at a time when computers were nowhere near as powerful as they are today, and companies would routinely rent computer usage from other companies so they would not have to purchase their own giant computers. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Computers have changed significantly from those days, but the intent of the rules regarding those expenses is still applicable. In modern use, the rules allow the inclusion of rented cloud computing power directly related to development. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This typically takes the form of a cloud environment (such as <strong><a href=\"https:\/\/aws.amazon.com\/\">Amazon AWS<\/a><\/strong> or <strong><a href=\"https:\/\/azure.microsoft.com\/en-us\">Microsoft Azure<\/a><\/strong>) that the taxpayer pays for and uses as a development space or testing space for their software; rented or leased servers may also qualify in this capacity.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">It is important to be aware that only the portion of the expense directly related to development is includable. Thus, AWS or Azure costs that are solely related to file storage are excluded from the analysis. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This also unfortunately means that software licenses such as CAD and other design tools, environments, and software that are purchased or rented, or self-hosted environments for development, are not eligible expenses to include in the credit analysis.<\/p>\n\n\n\n<h2 id=\"h-maximizing-your-identification-with-leyton-usa\" class=\"wp-block-heading\"><strong>Maximizing Your Identification with Leyton USA<\/strong><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Leyton USA\u2019s team of experienced professionals are here to assist you with your R&amp;D Tax Credit analysis and review your expenses to assist your company with identifying the largest credit it is eligible for under the IRS regulations. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If you have any questions about what you can or cannot include, please reach out to us and we would be happy to assist you in any way we can.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Research and Development (R&amp;D) tax credit is a powerful benefit that many companies make use of each year. However, only certain expenses qualify for inclusion in the R&amp;D tax credit analysis and understanding what to include or exclude can be confusing for taxpayers. At the highest level, expenses that are includable in the R&amp;D [&hellip;]<\/p>\n","protected":false},"author":72,"featured_media":6891,"menu_order":0,"comment_status":"open","ping_status":"open","template":"","format":"standard","meta":{"_acf_changed":false,"_leyton_l4m_sync":false,"footnotes":""},"categories":[75],"tags":[115],"expertise":[370],"class_list":["post-6879","article","type-article","status-publish","format-standard","has-post-thumbnail","hentry","category-rd-tax-credit-en","tag-rd-tax-credit-en","expertise-innovation-funding-incentives"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v28.1 (Yoast SEO v28.5) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>A Refresher on Qualified Research Expenses for the R&amp;D Tax Credit - Leyton United States<\/title>\n<meta name=\"description\" content=\"Master Qualified Research Expenses for the R&amp;D tax credit. 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