QREs determine how much you can claim under the federal R&D tax credit. Get them wrong and you leave money on the table, or create audit exposure. Here’s the definitive breakdown.
What Are Qualified Research Expenses?
Qualified Research Expenses (QREs) are the specific costs that can be used to calculate your federal R&D tax credit under IRC Section 41. They are not the same as your total R&D budget. Many companies spend significantly more on research and development than what ultimately qualifies under the IRS’s definition; and some spend less than they think, but on activities that qualify more cleanly than expected.
Getting your QREs right is the foundation of a defensible, maximized R&D tax credit claim. Overclaiming creates audit exposure. Underclaiming (which is far more common) means leaving non-dilutive government funding on the table.
The Four Categories of QREs
Eligible expenses for R&D tax credits fall into three primary categories under IRS rules. A fourth (basic research payments) applies to corporations making payments to qualifying research organizations.
1. Wages
Employee wages are typically the largest component of a QRE calculation. Qualifying wages include compensation paid to employees for time spent on:
- Directly performing qualified research activities
- Directly supervising qualified research activities
- Directly supporting qualified research activities
“Direct support” has a specific meaning in this context. An employee who maintains equipment used in qualified research, for example, may have a portion of their wages included. But support that is general or administrative in nature — HR, finance, IT not tied to research systems — does not qualify.
Importantly, only the portion of an employee’s time spent on qualifying activities counts. If an engineer spends 60% of their time on qualified research and 40% on non-qualifying work, only 60% of their wages are includable as QREs. This makes contemporaneous time-tracking — not year-end estimates — essential for substantiating wage-based QREs.
2. Supplies
Supply costs used directly in the conduct of qualified research are includable as QREs. This covers physical materials consumed or used in the research process: raw materials for prototypes, chemicals used in testing, components assembled into experimental units.
What it does not cover: general overhead supplies, capital equipment purchases, or materials used in production of finished goods rather than in the research process itself. The distinction between a supply used in research and a capital expenditure used in production is one of the more common points of IRS scrutiny.
3. Contract Research Expenses
When a company pays a third party to conduct qualified research on its behalf, 65% of those payments are includable as QREs, provided the company retains rights to the research results and bears the financial risk if the research is unsuccessful.
That last condition matters. If a contractor is paid regardless of whether the research succeeds, and the contractor retains rights to the output, those payments do not qualify. The economic risk must sit with the taxpayer.
For payments made to qualified research consortia, 75% of the amount is includable rather than 65%.
4. Basic Research Payments (C Corporations Only)
C corporations can include 100% of payments made to universities, scientific research organizations, and certain grant-funding organizations for basic research; research aimed at advancing scientific knowledge without a specific commercial application in mind. This category is narrower and less commonly applicable, but worth evaluating for companies with active academic partnerships.
What Does Not Qualify as a QRE
Understanding exclusions is just as important as understanding inclusions. The IRS is explicit about activities and costs that are off the table:
- Funded research — if your research is funded by a grant, government contract, or other outside party, those costs do not qualify as QREs
- Research conducted outside the U.S. — only domestic research qualifies under Section 41
- Social sciences, arts, and humanities — research must be technological in nature, grounded in hard sciences or engineering
- Market research and consumer surveys — gathering data about customer preferences does not qualify
- Quality control testing — testing finished products to confirm they meet specifications is not qualified research
- Duplication of existing products or processes — reverse engineering a competitor’s product or adapting an existing solution without technical uncertainty does not qualify
- Management studies and efficiency surveys — operational improvements without a technological component are excluded
The Four-Part Test: What Makes Research “Qualified”
Before any expense can be counted as a QRE, the underlying activity must pass the IRS’s four-part test. This applies regardless of industry or company size.
- Permitted Purpose — The research must aim to develop or improve the functionality, performance, reliability, or quality of a business component (a product, process, software, technique, formula, or invention).
- Technological in Nature — The activity must fundamentally rely on principles of engineering, physics, chemistry, biology, or computer science. Activities grounded in soft sciences or business judgment alone don’t pass this test.
- Elimination of Uncertainty — At the outset, there must be genuine uncertainty about whether the desired result is achievable, what the appropriate design is, or how to achieve the intended outcome. If the answer is already known, the activity doesn’t qualify.
- Process of Experimentation — The company must evaluate alternatives through systematic trial and error, modeling, simulation, or testing. A structured approach to solving the technical problem is required — not just intuition or standard practice.
All four parts must be satisfied. An activity that meets three of four does not produce qualifying QREs.
2026 Update: What’s Changed and Why It Matters
Two recent developments significantly affect how companies should be thinking about QREs right now.
Section 174 Expensing Restored
The Tax Cuts and Jobs Act of 2017 required companies to capitalize and amortize domestic R&D expenditures over five years beginning in 2022 — a change that delayed tax benefits and created a disconnect between Section 174 (cost treatment) and Section 41 (the credit). The One Big Beautiful Bill Act, signed July 4, 2025, restored immediate expensing for domestic R&D under Section 174. This doesn’t change what counts as a QRE under Section 41, but it significantly improves the cash flow picture for companies investing in qualifying research.
Form 6765 Section G: New Disclosure Requirements
Beginning with the 2026 tax year, the IRS is requiring businesses to complete Section G of Form 6765, which asks for detailed disclosure of qualifying business components, the nature of research activities, and the employees involved. This change reflects the IRS’s increased focus on R&D credit substantiation — and it raises the bar for documentation quality. Companies that have been estimating or reconstructing QRE data at filing time will find this new requirement more difficult to satisfy.
The Payroll Tax Credit Option for Qualified Small Businesses
Companies that don’t yet have income tax liability aren’t locked out of the R&D credit. Qualified Small Businesses (QSBs) — defined as companies with less than $5 million in gross receipts and no more than five years of gross receipts history — can elect to apply up to $500,000 of their R&D credit against payroll tax (FICA) liability instead. This makes the credit immediately usable for early-stage companies that are investing in R&D before reaching profitability.
QREs and the Alternative Minimum Tax
For tax years beginning after December 31, 2015, eligible small businesses (those with average annual gross receipts of $50 million or less over the prior three years) can use the R&D credit to offset Alternative Minimum Tax liability. Larger businesses should confirm their AMT position with their tax advisor.
Common QRE Mistakes That Create Audit Risk
The IRS scrutinizes R&D credit claims carefully, and certain patterns reliably draw attention:
- Claiming 100% of an employee’s wages without documentation to support that they spent all of their time on qualifying activities
- Including supply costs that are actually capital expenditures or production materials
- Including funded research payments that were reimbursed by a customer or government agency
- Reconstructing records at filing time rather than maintaining contemporaneous documentation throughout the year
- Failing to apply the four-part test rigorously to each activity, resulting in inclusion of costs that don’t qualify
The updated Form 6765 Section G makes these gaps harder to hide and easier for the IRS to identify.
How to Document QREs Effectively
Strong QRE documentation isn’t just about surviving an audit — it’s about capturing everything you’re legitimately entitled to claim. Best practices include:
- Tracking employee time against specific research projects throughout the year, not annually
- Maintaining project-level records that describe the technical uncertainty being addressed and the experimental approach taken
- Retaining supply receipts and linking them to specific qualifying research activities
- Documenting contractor agreements to establish that the company bears economic risk and retains rights to research results
- Keeping lab notebooks, engineering logs, test results, design iterations, and internal communications that reflect the research process
The IRS expects to see records that tell a coherent story about what was being developed, why it wasn’t straightforward, and how the company systematically worked toward a solution.
How Boast Approaches QRE Identification
Most companies that work with generalist accounting firms find that their QRE calculations are either too conservative — missing qualifying activities that weren’t obviously labeled as “R&D” — or too aggressive — including costs that don’t survive scrutiny.
Boast takes a different approach. Our platform integrates with your financial, payroll, and project management systems to capture qualifying activity data throughout the year, and our R&D tax specialists apply the four-part test rigorously across every activity we identify. The result is a claim that’s both maximized and defensible.
Since 2011, we’ve helped more than 2,000 companies across North America access over $900M in R&D tax credits — with a 100% audit defense commitment on every claim.
