26 U.S.C. § 41
Section 41 · Credit for increasing research activities
Current version, with additions and removals from the December 19, 2014 version.
For purposes of section 38, the research credit determined under this section for the taxable year shall be an amount equal to the sum of—
20 percent of the excess (if any) of—
the qualified research expenses for the taxable year, over
the base amount,
20 percent of the basic research payments determined under subsection (e)(1)(A), and
20 percent of the amounts paid or incurred by the taxpayer in carrying on any trade or business of the taxpayer during the taxable year (including as contributions) to an energy research consortium for energy research.
For purposes of section 38, the research credit determined under this section for the taxable year shall be an amount equal to the sum of—
20 percent of the excess (if any) of—
the qualified research expenses for the taxable year, over
the base amount,
20 percent of the basic research payments determined under subsection (e)(1)(A), and
20 percent of the amounts paid or incurred by the taxpayer in carrying on any trade or business of the taxpayer during the taxable year (including as contributions) to an energy research consortium for energy research.
For purposes of this section—
The term “qualified research expenses” means the sum of the following amounts which are paid or incurred by the taxpayer during the taxable year in carrying on any trade or business of the taxpayer—
in-house research expenses, and
contract research expenses.
The term “in-house research expenses” means—
any wages paid or incurred to an employee for qualified services performed by such employee,
any amount paid or incurred for supplies used in the conduct of qualified research, and
under regulations prescribed by the Secretary, any amount paid or incurred to another person for the right to use computers in the conduct of qualified research.
Clause (iii) shall not apply to any amount to the extent that the taxpayer (or any person with whom the taxpayer must aggregate expenditures under subsection (f)(1)) receives or accrues any amount from any other person for the right to use substantially identical personal property.
The term “qualified services” means services consisting of—
engaging in qualified research, or
engaging in the direct supervision or direct support of research activities which constitute qualified research.
If substantially all of the services performed by an individual for the taxpayer during the taxable year consists of services meeting the requirements of clause (i) or (ii), the term “qualified services” means all of the services performed by such individual for the taxpayer during the taxable year.
The term “supplies” means any tangible property other than—
land or improvements to land, and
property of a character subject to the allowance for depreciation.
The term “wages” has the meaning given such term by section 3401(a).
In the case of an employee (within the meaning of section 401(c)(1)), the term “wages” includes the earned income (as defined in section 401(c)(2)) of such employee.
The term “wages” shall not include any amount taken into account in determining the work opportunity credit under section 51(a).
The term “contract research expenses” means 65 percent of any amount paid or incurred by the taxpayer to any person (other than an employee of the taxpayer) for qualified research.
If any contract research expenses paid or incurred during any taxable year are attributable to qualified research to be conducted after the close of such taxable year, such amount shall be treated as paid or incurred during the period during which the qualified research is conducted.
Subparagraph (A) shall be applied by substituting “75 percent” for “65 percent” with respect to amounts paid or incurred by the taxpayer to a qualified research consortium for qualified research on behalf of the taxpayer and 1 or more unrelated taxpayers. For purposes of the preceding sentence, all persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as related taxpayers.
The term “qualified research consortium” means any organization which—
is described in section 501(c)(3) or 501(c)(6) and is exempt from tax under section 501(a),
is organized and operated primarily to conduct scientific research, and
is not a private foundation.
In the case of amounts paid by the taxpayer to—
an eligible small business,
an institution of higher education (as defined in section 3304(f)), or
an organization which is a Federal laboratory,
for qualified research which is energy research, subparagraph (A) shall be applied by substituting “100 percent” for “65 percent”.
For purposes of this subparagraph, the term “eligible small business” means a small business with respect to which the taxpayer does not own (within the meaning of section 318) 50 percent or more of—
in the case of a corporation, the outstanding stock of the corporation (either by vote or value), and
in the case of a small business which is not a corporation, the capital and profits interests of the small business.
For purposes of this subparagraph—
The term “small business” means, with respect to any calendar year, any person if the annual average number of employees employed by such person during either of the 2 preceding calendar years was 500 or fewer. For purposes of the preceding sentence, a preceding calendar year may be taken into account only if the person was in existence throughout the year.
Rules similar to the rules of subparagraphs (B) and (D) of section 220(c)(4) shall apply for purposes of this clause.
For purposes of this subparagraph, the term “Federal laboratory” has the meaning given such term by section 4(6) of the Stevenson-Wydler Technology Innovation Act of 1980 (15 U.S.C. 3703(6)), as in effect on the date of the enactment of the Energy Tax Incentives Act of 2005.
In the case of in-house research expenses, a taxpayer shall be treated as meeting the trade or business requirement of paragraph (1) if, at the time such in-house research expenses are paid or incurred, the principal purpose of the taxpayer in making such expenditures is to use the results of the research in the active conduct of a future trade or business—
of the taxpayer, or
of 1 or more other persons who with the taxpayer are treated as a single taxpayer under subsection (f)(1).
For purposes of this section—
The term “qualified research expenses” means the sum of the following amounts which are paid or incurred by the taxpayer during the taxable year in carrying on any trade or business of the taxpayer—
in-house research expenses, and
contract research expenses.
The term “in-house research expenses” means—
any wages paid or incurred to an employee for qualified services performed by such employee,
any amount paid or incurred for supplies used in the conduct of qualified research, and
under regulations prescribed by the Secretary, any amount paid or incurred to another person for the right to use computers in the conduct of qualified research.
Clause (iii) shall not apply to any amount to the extent that the taxpayer (or any person with whom the taxpayer must aggregate expenditures under subsection (f)(1)) receives or accrues any amount from any other person for the right to use substantially identical personal property.
The term “qualified services” means services consisting of—
engaging in qualified research, or
engaging in the direct supervision or direct support of research activities which constitute qualified research.
If substantially all of the services performed by an individual for the taxpayer during the taxable year consists of services meeting the requirements of clause (i) or (ii), the term “qualified services” means all of the services performed by such individual for the taxpayer during the taxable year.
The term “supplies” means any tangible property other than—
land or improvements to land, and
property of a character subject to the allowance for depreciation.
The term “wages” has the meaning given such term by section 3401(a).
In the case of an employee (within the meaning of section 401(c)(1)), the term “wages” includes the earned income (as defined in section 401(c)(2)) of such employee.
The term “wages” shall not include any amount taken into account in determining the work opportunity credit under section 51(a).
The term “contract research expenses” means 65 percent of any amount paid or incurred by the taxpayer to any person (other than an employee of the taxpayer) for qualified research.
If any contract research expenses paid or incurred during any taxable year are attributable to qualified research to be conducted after the close of such taxable year, such amount shall be treated as paid or incurred during the period during which the qualified research is conducted.
Subparagraph (A) shall be applied by substituting “75 percent” for “65 percent” with respect to amounts paid or incurred by the taxpayer to a qualified research consortium for qualified research on behalf of the taxpayer and 1 or more unrelated taxpayers. For purposes of the preceding sentence, all persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as related taxpayers.
The term “qualified research consortium” means any organization which—
is described in section 501(c)(3) or 501(c)(6) and is exempt from tax under section 501(a),
is organized and operated primarily to conduct scientific research, and
is not a private foundation.
In the case of amounts paid by the taxpayer to—
an eligible small business,
an institution of higher education (as defined in section 3304(f)), or
an organization which is a Federal laboratory,
for qualified research which is energy research, subparagraph (A) shall be applied by substituting “100 percent” for “65 percent”.
For purposes of this subparagraph, the term “eligible small business” means a small business with respect to which the taxpayer does not own (within the meaning of section 318) 50 percent or more of—
in the case of a corporation, the outstanding stock of the corporation (either by vote or value), and
in the case of a small business which is not a corporation, the capital and profits interests of the small business.
For purposes of this subparagraph—
The term “small business” means, with respect to any calendar year, any person if the annual average number of employees employed by such person during either of the 2 preceding calendar years was 500 or fewer. For purposes of the preceding sentence, a preceding calendar year may be taken into account only if the person was in existence throughout the year.
Rules similar to the rules of subparagraphs (B) and (D) of section 220(c)(4) shall apply for purposes of this clause.
For purposes of this subparagraph, the term “Federal laboratory” has the meaning given such term by section 4(6) of the Stevenson-Wydler Technology Innovation Act of 1980 (15 U.S.C. 3703(6)), as in effect on the date of the enactment of the Energy Tax Incentives Act of 2005.
In the case of in-house research expenses, a taxpayer shall be treated as meeting the trade or business requirement of paragraph (1) if, at the time such in-house research expenses are paid or incurred, the principal purpose of the taxpayer in making such expenditures is to use the results of the research in the active conduct of a future trade or business—
of the taxpayer, or
of 1 or more other persons who with the taxpayer are treated as a single taxpayer under subsection (f)(1).
For purposes of this section—
In determining the amount of the credit under this section—
all members of the same controlled group of corporations shall be treated as a single taxpayer, and
the credit (if any) allowable by this section to each such member shall be determined on a proportionate basis to its share of the aggregate of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, taken into account by such controlled group for purposes of this section.
Under regulations prescribed by the Secretary, in determining the amount of the credit under this section—
all trades or businesses (whether or not incorporated) which are under common control shall be treated as a single taxpayer, and
the credit (if any) allowable by this section to each such person shall be determined on a proportionate basis to its share of the aggregate of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, taken into account by all such persons under common control for purposes of this section.
The regulations prescribed under this subparagraph shall be based on principles similar to the principles which apply in the case of subparagraph (A).
Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section 52 shall apply.
In the case of partnerships, the credit shall be allocated among partners under regulations prescribed by the Secretary.
Under regulations prescribed by the Secretary—
If a person acquires the major portion of either a trade or business or a separate unit of a trade or business (hereinafter in this paragraph referred to as the “acquired business”) of another person (hereinafter in this paragraph referred to as the “predecessor”), then the amount of qualified research expenses paid or incurred by the acquiring person during the measurement period shall be increased by the amount determined under clause (ii), and the gross receipts of the acquiring person for such period shall be increased by the amount determined under clause (iii).
The amount determined under this clause is—
for purposes of applying this section for the taxable year in which such acquisition is made, the acquisition year amount, and
for purposes of applying this section for any taxable year after the taxable year in which such acquisition is made, the qualified research expenses paid or incurred by the predecessor with respect to the acquired business during the measurement period.
The amount determined under this clause is the amount which would be determined under clause (ii) if “the gross receipts of” were substituted for “the qualified research expenses paid or incurred by” each place it appears in clauses (ii) and (iv).
For purposes of clause (ii), the acquisition year amount is the amount equal to the product of—
the qualified research expenses paid or incurred by the predecessor with respect to the acquired business during the measurement period, and
the number of days in the period beginning on the date of the acquisition and ending on the last day of the taxable year in which the acquisition is made,
divided by the number of days in the acquiring person’s taxable year.
In the case of an acquiring person and a predecessor whose taxable years do not begin on the same date—
each reference to a taxable year in clauses (ii) and (iv) shall refer to the appropriate taxable year of the acquiring person,
the qualified research expenses paid or incurred by the predecessor, and the gross receipts of the predecessor, during each taxable year of the predecessor any portion of which is part of the measurement period shall be allocated equally among the days of such taxable year,
the amount of such qualified research expenses taken into account under clauses (ii) and (iv) with respect to a taxable year of the acquiring person shall be equal to the total of the expenses attributable under subclause (II) to the days occurring during such taxable year, and
the amount of such gross receipts taken into account under clause (iii) with respect to a taxable year of the acquiring person shall be equal to the total of the gross receipts attributable under subclause (II) to the days occurring during such taxable year.
For purposes of this subparagraph, the term “measurement period” means, with respect to the taxable year of the acquiring person for which the credit is determined, any period of the acquiring person preceding such taxable year which is taken into account for purposes of determining the credit for such year.
If the predecessor furnished to the acquiring person such information as is necessary for the application of subparagraph (A), then, for purposes of applying this section for any taxable year ending after such disposition, the amount of qualified research expenses paid or incurred by, and the gross receipts of, the predecessor during the measurement period (as defined in subparagraph (A)(vi), determined by substituting “predecessor” for “acquiring person” each place it appears) shall be reduced by—
in the case of the taxable year in which such disposition is made, an amount equal to the product of—
the qualified research expenses paid or incurred by, or gross receipts of, the predecessor with respect to the acquired business during the measurement period (as so defined and so determined), and
the number of days in the period beginning on the date of acquisition (as determined for purposes of subparagraph (A)(iv)(II)) and ending on the last day of the taxable year of the predecessor in which the disposition is made,
divided by the number of days in the taxable year of the predecessor, and
in the case of any taxable year ending after the taxable year in which such disposition is made, the amount described in clause (i)(I).
If during any of the 3 taxable years following the taxable year in which a disposition to which subparagraph (B) applies occurs, the disposing taxpayer (or a person with whom the taxpayer is required to aggregate expenditures under paragraph (1)) reimburses the acquiring person (or a person required to so aggregate expenditures with such person) for research on behalf of the taxpayer, then the amount of qualified research expenses of the taxpayer for the taxable years taken into account in computing the fixed-base percentage shall be increased by the lesser of—
the amount of the decrease under subparagraph (B) which is allocable to taxable years so taken into account, or
the product of the number of taxable years so taken into account, multiplied by the amount of the reimbursement described in this subparagraph.
In the case of any short taxable year, qualified research expenses and gross receipts shall be annualized in such circumstances and under such methods as the Secretary may prescribe by regulation.
The term “controlled group of corporations” has the same meaning given to such term by section 1563(a), except that—
“more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a)(1), and
the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563.
The term “energy research consortium” means any organization—
which is—
described in section 501(c)(3) and is exempt from tax under section 501(a) and is organized and operated primarily to conduct energy research, or
organized and operated primarily to conduct energy research in the public interest (within the meaning of section 501(c)(3)),
which is not a private foundation,
to which at least 5 unrelated persons paid or incurred during the calendar year in which the taxable year of the organization begins amounts (including as contributions) to such organization for energy research, and
to which no single person paid or incurred (including as contributions) during such calendar year an amount equal to more than 50 percent of the total amounts received by such organization during such calendar year for energy research.
All persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as related persons for purposes of subparagraph (A)(iii) and as a single person for purposes of subparagraph (A)(iv).
For purposes of subsection (a)(3), amounts paid or incurred for any energy research conducted outside the United States, the Commonwealth of Puerto Rico, or any possession of the United States shall not be taken into account.
Any amount taken into account under subsection (a)(3) shall not be taken into account under paragraph (1) or (2) of subsection (a).
The term “energy research” does not include any research which is not qualified research.
For purposes of this section—
In determining the amount of the credit under this section—
all members of the same controlled group of corporations shall be treated as a single taxpayer, and
the credit (if any) allowable by this section to each such member shall be determined on a proportionate basis to its share of the aggregate of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, taken into account by such controlled group for purposes of this section.
Under regulations prescribed by the Secretary, in determining the amount of the credit under this section—
all trades or businesses (whether or not incorporated) which are under common control shall be treated as a single taxpayer, and
the credit (if any) allowable by this section to each such person shall be determined on a proportionate basis to its share of the aggregate of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, taken into account by all such persons under common control for purposes of this section.
The regulations prescribed under this subparagraph shall be based on principles similar to the principles which apply in the case of subparagraph (A).
Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section 52 shall apply.
In the case of partnerships, the credit shall be allocated among partners under regulations prescribed by the Secretary.
Under regulations prescribed by the Secretary—
If a person acquires the major portion of either a trade or business or a separate unit of a trade or business (hereinafter in this paragraph referred to as the “acquired business”) of another person (hereinafter in this paragraph referred to as the “predecessor”), then the amount of qualified research expenses paid or incurred by the acquiring person during the measurement period shall be increased by the amount determined under clause (ii), and the gross receipts of the acquiring person for such period shall be increased by the amount determined under clause (iii).
The amount determined under this clause is—
for purposes of applying this section for the taxable year in which such acquisition is made, the acquisition year amount, and
for purposes of applying this section for any taxable year after the taxable year in which such acquisition is made, the qualified research expenses paid or incurred by the predecessor with respect to the acquired business during the measurement period.
The amount determined under this clause is the amount which would be determined under clause (ii) if “the gross receipts of” were substituted for “the qualified research expenses paid or incurred by” each place it appears in clauses (ii) and (iv).
For purposes of clause (ii), the acquisition year amount is the amount equal to the product of—
the qualified research expenses paid or incurred by the predecessor with respect to the acquired business during the measurement period, and
the number of days in the period beginning on the date of the acquisition and ending on the last day of the taxable year in which the acquisition is made,
divided by the number of days in the acquiring person’s taxable year.
In the case of an acquiring person and a predecessor whose taxable years do not begin on the same date—
each reference to a taxable year in clauses (ii) and (iv) shall refer to the appropriate taxable year of the acquiring person,
the qualified research expenses paid or incurred by the predecessor, and the gross receipts of the predecessor, during each taxable year of the predecessor any portion of which is part of the measurement period shall be allocated equally among the days of such taxable year,
the amount of such qualified research expenses taken into account under clauses (ii) and (iv) with respect to a taxable year of the acquiring person shall be equal to the total of the expenses attributable under subclause (II) to the days occurring during such taxable year, and
the amount of such gross receipts taken into account under clause (iii) with respect to a taxable year of the acquiring person shall be equal to the total of the gross receipts attributable under subclause (II) to the days occurring during such taxable year.
For purposes of this subparagraph, the term “measurement period” means, with respect to the taxable year of the acquiring person for which the credit is determined, any period of the acquiring person preceding such taxable year which is taken into account for purposes of determining the credit for such year.
If the predecessor furnished to the acquiring person such information as is necessary for the application of subparagraph (A), then, for purposes of applying this section for any taxable year ending after such disposition, the amount of qualified research expenses paid or incurred by, and the gross receipts of, the predecessor during the measurement period (as defined in subparagraph (A)(vi), determined by substituting “predecessor” for “acquiring person” each place it appears) shall be reduced by—
in the case of the taxable year in which such disposition is made, an amount equal to the product of—
the qualified research expenses paid or incurred by, or gross receipts of, the predecessor with respect to the acquired business during the measurement period (as so defined and so determined), and
the number of days in the period beginning on the date of acquisition (as determined for purposes of subparagraph (A)(iv)(II)) and ending on the last day of the taxable year of the predecessor in which the disposition is made,
divided by the number of days in the taxable year of the predecessor, and
in the case of any taxable year ending after the taxable year in which such disposition is made, the amount described in clause (i)(I).
If during any of the 3 taxable years following the taxable year in which a disposition to which subparagraph (B) applies occurs, the disposing taxpayer (or a person with whom the taxpayer is required to aggregate expenditures under paragraph (1)) reimburses the acquiring person (or a person required to so aggregate expenditures with such person) for research on behalf of the taxpayer, then the amount of qualified research expenses of the taxpayer for the taxable years taken into account in computing the fixed-base percentage shall be increased by the lesser of—
the amount of the decrease under subparagraph (B) which is allocable to taxable years so taken into account, or
the product of the number of taxable years so taken into account, multiplied by the amount of the reimbursement described in this subparagraph.
In the case of any short taxable year, qualified research expenses and gross receipts shall be annualized in such circumstances and under such methods as the Secretary may prescribe by regulation.
The term “controlled group of corporations” has the same meaning given to such term by section 1563(a), except that—
“more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a)(1), and
the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563.
The term “energy research consortium” means any organization—
which is—
described in section 501(c)(3) and is exempt from tax under section 501(a) and is organized and operated primarily to conduct energy research, or
organized and operated primarily to conduct energy research in the public interest (within the meaning of section 501(c)(3)),
which is not a private foundation,
to which at least 5 unrelated persons paid or incurred during the calendar year in which the taxable year of the organization begins amounts (including as contributions) to such organization for energy research, and
to which no single person paid or incurred (including as contributions) during such calendar year an amount equal to more than 50 percent of the total amounts received by such organization during such calendar year for energy research.
All persons treated as a single employer under subsection (a) or (b) of section 52 shall be treated as related persons for purposes of subparagraph (A)(iii) and as a single person for purposes of subparagraph (A)(iv).
For purposes of subsection (a)(3), amounts paid or incurred for any energy research conducted outside the United States, the Commonwealth of Puerto Rico, or any possession of the United States shall not be taken into account.
Any amount taken into account under subsection (a)(3) shall not be taken into account under paragraph (1) or (2) of subsection (a).
The term “energy research” does not include any research which is not qualified research.
In the case of an individual who—
owns an interest in an unincorporated trade or business,
is a partner in a partnership,
is a beneficiary of an estate or trust, or
is a shareholder in an S corporation,
the amount determined under subsection (a) for any taxable year shall not exceed an amount (separately computed with respect to such person’s interest in such trade or business or entity) equal to the amount of tax attributable to that portion of a person’s taxable income which is allocable or apportionable to the person’s interest in such trade or business or entity. If the amount determined under subsection (a) for any taxable year exceeds the limitation of the preceding sentence, such amount may be carried to other taxable years under the rules of section 39; except that the limitation of the preceding sentence shall be taken into account in lieu of the limitation of section 38(c) in applying section 39.
In the case of an individual who—
owns an interest in an unincorporated trade or business,
is a partner in a partnership,
is a beneficiary of an estate or trust, or
is a shareholder in an S corporation,
the amount determined under subsection (a) for any taxable year shall not exceed an amount (separately computed with respect to such person’s interest in such trade or business or entity) equal to the amount of tax attributable to that portion of a person’s taxable income which is allocable or apportionable to the person’s interest in such trade or business or entity. If the amount determined under subsection (a) for any taxable year exceeds the limitation of the preceding sentence, such amount may be carried to other taxable years under the rules of section 39; except that the limitation of the preceding sentence shall be taken into account in lieu of the limitation of section 38(c) in applying section 39.