Short answer. 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.
The 65% rule
Contract research counts, but at a fixed fraction.
Section 41(b)(3) includes 65% of any amount a company pays to a person other than an employee for qualified research. The other 35% is treated as the contractor's profit and overhead, which the credit does not reward.
A higher rate applies to payments to qualified research consortia, but 65% is the rate that applies to ordinary contractor work.
The percentage applies to the payment, not to the contractor's underlying labor cost. The company rarely sees that cost breakdown, so the statute uses a flat fraction instead.
When a contractor payment qualifies
A payment only counts if the work is really the company's research.
The company has to bear the economic risk of the research. If the contractor is paid whether or not the research succeeds, the work is funded research to the company, and the payment does not qualify. Payment contingent on results keeps the risk where it belongs.
The company also has to keep substantial rights to the research results. A contract that hands every right to the contractor strips the payment of its qualified status.
These are the same risk-and-rights ideas that drive the funded research exclusion, seen from the paying company's side.
What this means for your binder
Contractor-heavy claims draw extra scrutiny, so the paperwork matters.
More than half a claim resting on contract research is a known audit-risk signal, so the file has to show the contracts, the statements of work, and who held the risk and the rights.
R&D Binder keeps contractor invoices and the 65% calculation in the workpaper, mapped to the business component the work supported.
Related references
Contract research is one input to the QRE total:
Sources
Every claim on this page traces to a primary authority. Each source below is independent and verifiable.
- 26 U.S.C. § 41(b)(3), contract research expenses - Cornell Law School, Legal Information Institute
- Treas. Reg. § 1.41-2(e), contract research expenses - Cornell Law School, Legal Information Institute
- IRS, Instructions for Form 6765 - Internal Revenue Service
Get documentation built to survive an exam
R&D Binder separates contractor cost from employee wages in the QRE workpaper and applies the 65% factor where it belongs, so the contract research line on Form 6765 is built correctly and your CPA can trace every dollar.