Section 41 R&D tax credit glossary

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Qualified Research Expense (QRE) - A qualified research expense (QRE) is a cost that counts toward the Section 41 research credit: in-house wages for qualified services, supplies used in the research, computer and cloud rental, and 65 percent of amounts paid to outside contractors for qualified research.
Business Component - A business component is the product, process, computer software, technique, formula, or invention that a company develops or improves and holds for sale, lease, license, or use in its own business. It is the unit the Section 41 four-part test is applied to.
Qualified Small Business (QSB) Payroll-Tax Offset - The qualified small business (QSB) payroll-tax offset lets an early-stage company apply up to $500,000 of its Section 41 R&D credit per year against employer payroll taxes instead of income tax, under Section 41(h) and Section 3111(f). It is how pre-profit startups turn the credit into cash.
Form 6765 - Form 6765, Credit for Increasing Research Activities, is the IRS form a business files with its tax return to claim the Section 41 R&D credit. It computes the credit, holds the payroll-tax election for small businesses, and from tax year 2026 carries the per-business-component detail in Section G.
Alternative Simplified Credit (ASC) - The Alternative Simplified Credit (ASC) is one of two ways to compute the Section 41 R&D credit, under Section 41(c)(5). It equals 14 percent of current-year qualified research expenses above 50 percent of the prior three years' average, and it is the method most startups use because it needs no 1980s base-period data.
Contemporaneous Documentation - Contemporaneous documentation is evidence of qualified research created at the time the work is done, such as commits, pull requests, design docs, and spike tickets, rather than reconstructed after the fact. It is the most credible way to substantiate a Section 41 credit in an exam.
Qualified Research Activity (QRA) - A qualified research activity (QRA) is work that meets all four parts of the Section 41 test under Section 41(d): a permitted purpose, technological in nature, eliminating uncertainty, through a process of experimentation. The statutory term is 'qualified research'; the activity is what earns the credit, and the qualified research expense is what it costs.
Section 174A - Section 174A, enacted by the One Big Beautiful Bill Act in 2025, lets a company immediately deduct its domestic research and experimental costs again, reversing the five-year capitalization that applied from 2022. It is the deduction side of R&D tax, separate from the Section 41 credit, and most companies claim both.
Internal-use software (IUS) - Internal-use software (IUS) is software a company develops primarily for its own general and administrative functions, like finance, human resources, or back-office support. It can still qualify for the Section 41 research credit, but only after it passes an extra three-part test that ordinary software does not face. The rule exists because most internal tools are routine, and the credit is meant for genuine technical risk.
Contract research expenses - Contract research expenses are amounts a company pays to a third party, like a contractor or outside firm, to perform qualified research on its behalf. The Section 41 credit includes these payments at 65 cents on the dollar, not the full amount. The reduced rate is a fixed statutory haircut, and the payment counts only when the company keeps the research risk and the rights to the results.
Funded research - Funded research is research paid for by a grant, a contract, or another party where the performer does not keep the financial risk or substantial rights to the results. Section 41(d)(4)(H) excludes funded research from the credit. The test is not who writes the check. It is whether payment depends on the research succeeding, and who owns what the research produces.
Substantially-all (80%) rule - The substantially-all rule is the 80% threshold in the Section 41 four-part test. For a business component to qualify, at least 80% of its research activities, measured by cost or another reasonable basis, has to be elements of a process of experimentation. Meet the 80% and the whole component can qualify. Fall short and the experimentation requirement fails for that component.
Section 174 - Section 174 is the tax rule for deducting research and experimental costs. A 2017 change took effect in 2022 and forced companies to capitalize those costs and write them off over five years for domestic work, instead of deducting them right away. Section 174A reversed that for domestic research starting in 2025. Section 174 is the deduction side of R&D tax, separate from the Section 41 credit.
Section 280C election - Section 280C(c) keeps a company from getting a double tax benefit on the same research dollars. By default, claiming the Section 41 credit reduces the research deduction by the amount of the credit. The Section 280C election is the alternative: take a smaller credit and keep the full deduction. Which one comes out ahead depends on the company's tax position, and the election is made on the return.

The Section 41 R&D tax credit glossary

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