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26 CFR 1.41-4A - Qualified research for taxable years beginning before January 1, 1986.
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p r ev | n ex t Qualified research for taxable years beginning before January 1, 1986. (a) Ge ner al rule . Except as otherwise provided in section 30(d) (as that section read before amendment by the Tax Reform Act of 1986) and in this section, the term qualified research means research, expenditures for which would be research and experimental 1.41-4A
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section 174 deduction elections are not expenditures for qualified research. For example, expenditures for the acquisition of land or depreciable property used in research, and research. mineral exploration costs described in section 174(d), are not expenditures for qualified

expenditures within the meaning of section 174. Expenditures that are ineligible for the

laboratory in the United States and in a test station in Antarctica must be apportioned outside the United States, and only the wages apportioned to the services conducted between the services performed within the United States and the services performed

qualified research. Thus, wages paid to an employee scientist for services performed in a

conducted outside the United States (as defined in section 7701(a)(9)) cannot constitute

(b) Activities outside the United S tates ( 1) In-hous e r ese arch. In-house research

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1.41-2(d)(2) applies.

within the United States are qualified research expenses unless the 80 percent rule of (2) Contract res earch. If contract research is performed partly within the United States and partly without, only 65 percent of the portion of the contract amount that is attributable to the research performed within the United States can qualify as contract performed in the United States).

research expense (even if 80 percent or more of the contract amount was for research (c) S ocial s cie nce s or hu manitie s. Qualified research does not include research in the

amendment by the Tax Reform Act of 1986) and of this section, the phrase research in in a field of laboratory science (such as physics or biochemistry), engineering or

social sciences or humanities. For purposes of section 30(d)(2) (as that section read before

the social sciences or humanities encompasses all areas of research other than research

accounting procedure or a new cookbook.

technology. Examples of research in the social sciences or humanities include the development of a new life insurance contract, a new economic model or theory, a new

not constitute qualified research to the extent it is funded by any grant, contract, or

(d) Rese arch funde d by any gr ant, con tract, or othe rwis e (1) In g ener al. Research does otherwise by another person (including any governmental entity). All agreements (not only

research contracts) entered into between the taxpayer performing the research and other persons shall be considered in determining the extent to which the research is funded. and thus considered to be paid for the product or result of the research (see 1.41-2(e)

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26 CFR 1.41-4A - Qualified research for taxable years beginning before January 1, 1986. ... Page 2 of 4

(2)) are not treated as funding. For special rules regarding funding between commonly controlled businesses, see 1.41-6(e). another person retains no substantial rights in research under the agreement providing (H), and no expenses paid or incurred by the taxpayer in performing the research are for the research, the research is treated as fully funded for purposes of section 41(d)(4) (2) Re sear ch in w hich taxpaye r re tains no r ights . If a taxpayer performing research for

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qualified research expenses. For example, if the taxpayer performs research under an agreement that confers on another person the exclusive right to exploit the results of

treated as fully funded under this paragraph (d)(2). Incidental benefits to the taxpayer from performance of the research (for example, increased experience in a field of

the research, the taxpayer is not performing qualified research because the research is

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research for another person retains no substantial rights in the research and if the

research) do not constitute substantial rights in the research. If a taxpayer performing payments to the researcher are contingent upon the success of the research, neither

the performer nor the person paying for the research is entitled to treat any portion of the expenditures as qualified research expenditures. (3) Re sear ch in w hich th e taxpaye r r etains su bs tantial right s (i) In ge ner al. If a research under the agreement providing for the research, the research is funded to the becomes entitled by performing the research. A taxpayer does not retain substantial rights in the research if the taxpayer must pay for the right to use the results of the research. Except as otherwise provided in paragraph (d)(3)(ii) of this section, the would, but for section 41(d)(4)(H), constitute qualified research expenses of the extent of the payments (and fair market value of any property) to which the taxpayer taxpayer performing research for another person retains substantial rights in the

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taxpayer shall reduce the amount paid or incurred by the taxpayer for the research that

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taxpayer by the amount of funding determined under the preceding sentence.

( ii) Pro rata allocation. If the taxpayer can establish to the satisfaction of the district director (A ) The total amount of research expenses, (B ) That the total amount of research expenses exceed the funding, and would be qualified research expenses if there were no funding) exceed 65 percent of otherwise qualified research expenses, rather than allocating it 100 percent to the funding, then the taxpayer may allocate the funding pro rata to nonqualified and (C) That the otherwise qualified research expenses (that is, the expenses which

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section). In no event, however, shall less than 65 percent of the funding be applied against the otherwise qualified research expenses. ( iii) Project-by -project de term ination. The provisions of this paragraph (d)(3) shall be applied separately to each research project undertaken by the taxpayer. ( 4 ) I n d e pe n d e n t r e s e a r c h a n d d e v e l o p m e n t u n d e r t h e F e d e r a l A c q u i s i t i o n Regu lation s Syst em and s im ilar provis ions . The Federal Acquisition Regulations

otherwise qualified research expenses (as provided in paragraph (d)(3)(i) of this

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System and similar rules and regulations relating to contracts (fixed price, cost plus,

and development costs and bid and proposal costs of a contractor to contracts entered into with that contractor. In general, any independent research and

etc.) with government entities provide for allocation of certain independent research

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development costs and bid and proposal costs paid to a taxpayer by reason of such a contract shall not be treated as funding the underlying research activities except to the
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the Tax Reform Act of 1986.

extent the independent research and development costs and bid and proposal costs are properly severable from the contract. See 1.451-3(e); see also section 804(d)(2) of

(5) Fu nding de term inable only in s ubse qu ent taxable ye ar. If at the time the taxpayer research performed by the taxpayer during that year may be funded, then the taxpayer shall treat the research as completely funded for purposes of completing that return. When the amount of funding is finally determined, the taxpayer should amend the

files its return for a taxable year, it is impossible to determine to what extent particular

return and any interim returns to reflect the proper amount of funding.

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(6) E xamples. The following examples illustrate the application of the principles contained in this paragraph. Example 1.

A enters into a contract with B Corporation, a cash-method taxpayer using the calendar year as its taxable year, under which B is to perform research that would, but for

$120x, regardless of the outcome of the research. In 1982, A makes full payment of $120x under the contract, B performs all the research, and B pays all the expenses connected with the research, as follows: In-house research expenses$100xOutside research:(Amount B paid to third parties for

section 41(d)(3)(H), be qualified research of B. The agreement calls for A to pay B

40xOverhead and other expenses10xTotal150x

research, 65 percent of which ($26x) is treated as a contract research expense of B)

If B has no rights to the research, B is fully funded. Alternatively, assume that B retains qualified research expenses of $126x $26x), $120x is treated as funded by A. Thus

the right to use the results of the research in carrying on B's business. Of B's otherwise

$6x ($126x $120x) is treated as a qualified research expense of B. However, if B funding pro rata to nonqualified and otherwise qualified research expenses. Thus

establishes the facts required under paragraph (d)(3) of this section, B can allocate the

$100.8x ($120x ($126x/$150x)) would be allocated to otherwise qualified research

rights to use the results of the research in carrying on B's business. Example 2.

expenses. B's qualified research expenses would be $25.2x ($126x $100.8x). For purposes of the following examples (2), (3) and (4) assume that B retains substantial

The facts are the same as in example (1) (assuming that B retains the right to use the

results of the research in carrying on B's business) except that, although A makes full

payment of $120x during 1982, B does not perform the research or pay the associated

expenses until 1983. The computations are unchanged. However, B's qualified research expenses determined in example (1) are qualified research expenses during 1983.

The facts are the same as in example (1) (assuming that B retains the right to use the research and pays the associated expenses during 1982, A does not pay the $120x (1) is a qualified research expense of B during 1982.

Example 3.

results of the research in carrying on B's business) except that, although B performs the until 1983. The computations are unchanged and the amount determined in example

The facts are the same as in example (1) (assuming that B retains the right to use the

Example 4.

results of the research in carrying on B's business) except that, instead of agreeing to

and A pays B $120x during 1982. The $20x payment that is conditional on the success satisfaction of the district director the actual research expenses, B can allocate the funding to nonqualified and otherwise qualified research expenses. Thus $84x ($100x qualified research expenses would be $42x ($126x $84x). Example 5. ($126x/$150x)) would be allocated to otherwise qualified research expenses. B's of the research is not treated as funding. Assuming that B establishes to the

only if B's research produces a useful product. B's research produces a useful product

pay B $120x, A agrees to pay $100x regardless of the outcome and an additional $20x

C enters into a contract with D, a cash-method taxpayer using the calendar year as its substantial rights. C agrees to reimburse D for 80 percent of D's expenses for the research. D performs part of the research in 1982 and the rest in 1983. At the time research is funded under the provisions of this paragraph. Under these circumstances, D may not treat any of the expenses paid by D for this research during 1982 as that D files its return for 1982, D is unable to determine the extent to which the taxable year, under which D is to perform research in which both C and D will have

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qualified research expenses on its 1982 return. When the project is complete and D can determine the extent of funding, D should file an amended return for 1982 to take into account any qualified research expense for 1982.

[T.D. 8251, 54 FR 21204, May 17, 1989. Redesignated and amended by T.D. 8930, 66 FR 295, Jan. 3, 2001]

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