R&D Binder

Short answer. 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.

The four QRE categories

Section 41(b) sorts every qualifying cost into four categories. The credit is computed on their total.

  • Wages for qualified services. Box 1 W-2 wages paid to employees who perform qualified research, directly supervise it, or directly support it. For a software team this is most of the engineering payroll, allocated to the hours spent on qualifying work.
  • Supplies. Tangible property used and consumed in the research that is not a capital item. Usually small for pure software; it shows up when a team buys prototyping hardware or test devices.
  • Computer and cloud rental. Payments to use someone else's computers for the research. For SaaS this is the AWS, GCP, Azure, Vercel, or Cloudflare spend that ran the experiments, not the production bill for serving paying customers.
  • Contract research, counted at 65 percent. Amounts paid to outside contractors for qualified research count at 65 percent under Section 41(b)(3). Pay a contractor $100,000 for qualifying work and $65,000 reaches the credit.

What counts and what does not

The line is whether the cost is a research input, not overhead and not capital.

Counts toward QRE

  • Engineering wages for the hours spent on qualifying work.
  • Cloud and compute used to run experiments and tests.
  • Supplies consumed in the research.
  • 65 percent of qualifying contractor invoices.

Does not count

  • Rent, utilities, and general administrative overhead.
  • Capital purchases and the depreciation on them.
  • Foreign research, which stays capitalized over 15 years under Section 174A(c) and is excluded from Section 41 QRE.
  • Funded research, where you are paid regardless of outcome or do not keep substantial rights, under Section 41(d)(4)(H).
  • The 35 percent of a contractor invoice above the 65 percent applied amount.

How QREs become a credit

The dollars are only as good as the allocation behind them.

The credit is a percentage of QRE, so the QRE total drives the result. The number has to hold up per business component, not as a single company-wide estimate.

R&D Binder allocates the payroll register to components by commit author and time, applies the 65 percent reduction to contract research before anything reaches the schedule, and reconciles the four categories to the QRE workpaper, so the Section G figure and the workpaper match by construction.

If you are a qualified small business, up to $500,000 of the credit can be applied against employer payroll tax under Section 41(h) and Section 3111(f). That matters when the company is pre-revenue and has no income-tax bill to offset yet.

QRE is the dollar side of the credit. These cover the qualifying side and where the numbers land on the form:

Sources

Every claim on this page traces to a primary authority. Each source below is independent and verifiable.

Get documentation built to survive an exam

R&D Binder builds the QRE workpaper from your payroll register and computes the four categories per business component, reconciled to the Form 6765 Section G schedule.

Estimate your credit See the sample binder