If your business is exploring the R&D Tax Credit, you’ve probably come across the term “Qualified Research Expenses,” or QREs. It sounds technical, but the concept is straightforward, and understanding it is the key to knowing how much your credit could be worth.
QREs Are the Foundation of Your Credit
The R&D Tax Credit is calculated as a percentage of your Qualified Research Expenses. In simple terms, QREs are the costs your business incurs while conducting eligible research and development activities. The higher your QREs, the larger your potential credit.
But not every dollar spent on innovation counts. The IRS defines three specific categories of expenses that qualify.
The Three Categories of QREs
Wages: This is typically the largest driver of the credit. Salaries paid to employees who are directly performing, supervising, or supporting qualifying research activities are includable as QREs. For most businesses, this means technical staff, engineers, developers, scientists, and the managers who oversee their work.
Supplies: Costs for materials consumed during the research process, things like components, test materials, or prototypes can qualify. Note that general and administrative supplies don’t count; these need to be directly tied to the qualifying activity.
Contract Research: If your business hires outside contractors to perform qualifying research on your behalf, 65% of those payments can be included as QREs. There are specific requirements around who controls the research and who bears the financial risk, so this category requires careful analysis.
One Important Note on Computer Leasing
In some cases, costs associated with leasing computers used directly in qualifying research may also be included, though this is less common and depends on how the equipment is used.
How QREs Translate Into a Credit
Once your QREs are identified, the credit is calculated using one of two IRS-approved methods. Under the most commonly used approach, the Alternative Simplified Credit, eligible businesses receive a credit equal to 14% of QREs above 50% of their average QREs for the prior three years. In practical terms, most businesses see a credit worth roughly 6–8% of their total qualified expenses.
That might not sound dramatic, but consider what it means on scale: a company with $1 million in qualified wages could be looking at $60,000–$80,000 in annual tax credits, and potentially more when state-level credits are factored in.
QREs Have to Be Tied to Qualifying Activities
It’s worth noting that not every R&D expense automatically qualifies. QREs must be connected to activities that pass the IRS four-part test, meaning the work must be technological in nature, aimed at developing or improving a product or process, involve a process of experimentation, and be intended for a permitted purpose. Identifying which of your activities and expenses meet that standard is where the real analysis happens.
The Bottom Line
QREs are the building blocks of your R&D Tax Credit. Getting them right, identifying every eligible expense category, properly allocating employee time, and tying costs to qualifying activities, is what separates a maximized, defensible credit from one that leaves money on the table.
If you’re not sure whether your expenses qualify, or you want to understand what your credit could look like, CSSI can help. We offer a no-cost analysis to give you a clearer picture before any commitment is made.
