The Qualifying Research Expenses are the amounts paid or incurred during the taxable year, which include the following types of in-house expenses:

• Research Wages – wages paid to an employee for qualifying research activities performed by such employee, and
• Research Supply Expenses – amounts paid or incurred for supplies used in the conduct of qualifying research activities, and
• Research Contract Expenses – contracted expenses incurred in the U.S. relating to amounts paid for services relating to qualifying research activities.

Research wages constitute the taxable wages paid to an employee relating to qualifying research activities. If an employee had performed both qualifying services and non-qualifying services, only the amount of wages allocated to the performance of qualifying research activities constitutes an in-house research expense.

In the absence of another method of allocation that is demonstrated to be more accurate, the amount of in-house research wages shall be determined by multiplying the total amount of taxable wages paid to the employee during the taxable year by the ratio of the total time spent by the employee in the performance of qualifying research activities to the total time spent by the employee in the performance of all services during the taxable year.

In addition to any documentation establishing the occurrence of the research activities and the wages paid for qualifying activities, credible corroborating testimony can be used to facilitate the estimation of time spent by individuals and corresponding research wages associated with qualifying activities providing the following:

• The testimony is considered valid to the extent that it is credible, and
• The testimony is obtained from individuals with first-hand knowledge regarding who conducted the claimed activities.

Research Supply Expenses relate to those supplies ‘consumed’ while carrying out qualifying research activities. Examples of research supply expenses would include the invoiced cost associated with:

• Components for prototype products and systems
• Experimental production tooling
• Chemicals and other materials consumed during process testing

Contract Research Expenses means 65 percent of any amount paid or incurred by the company for qualifying research activities carried out by a business or person other than an employee of the company. The actual work concerning contracted research must be carried out in the United States and its territories. Examples of contracted research expenses include the invoiced fees regarding the following:

• Engineering Consultants
• Subcontractors used to operate prototype process system during development
• Contracted test labs (e.g. UL, CE, CSA, FDA, NEMA, FCC)