To stimulate research investment in the United States, Congress initially provisioned a general business tax credit under Internal Revenue Code section 41 in conjunction with The Economic Recovery Tax Act of 1981. Although the most substantial investment in research and development is a company’s people (and subsequently their wages), the supplies they use to create, test, and prove out ideas may be substantial and reimbursable. Supplies used in the conduct of qualified research activities can have a meaningful impact on the full amount of R&D tax credit.
Qualified supplies are defined as supplies used in the conduct of qualified research. Generally, they include the following: inventory used for prototypes, prototype components, prototype machines, pilot models, lab materials, testing materials, and extraordinary utilities. R&D supplies are often captured inside general ledger accounts. However, this is not a requirement.
Supplies that are directly used to perform qualified services may be fully reimbursed. Supplies that are indirectly used for research expenditures, general and administrative expenses or personal property do not qualify as in-house research expenses and are not allowed as part of the R&D tax credit. Depreciable property and land are also excluded from the calculation of qualified research.
For utilities, specific qualifying expenditures can be treated as amounts paid or incurred for qualified research. For example, the amounts paid for electricity used exclusively in operating high-energy equipment for qualified research (such as laser or nuclear research) may be treated as expenditures, while the amounts paid for electricity used for general laboratory lighting are treated as general and administrative expenses and disallowed.
Earnd can help you qualify how supplies are used in connection with your R&D activities and how best to quantify the amounts.