Contract Research Expenses and the R&D Tax Credit: What Ohio Businesses Should Know

Ohio businesses often use outside engineers, software developers, testing laboratories, consultants, and other specialists to support technical development work. In some cases, those payments may qualify as contract research expenses for the R&D Tax Credit.

Quick answer: For many contract research arrangements, 65% of qualifying amounts paid or incurred to a third party may be included as qualified research expenses. But the 65% rule does not apply automatically to every contractor invoice. The work performed, agreement terms, financial risk, rights to the research, and location of the research all matter.



Since 2004, RCG Tax Partners has completed more than 25,000 R&D tax credit studies and identified over $750 million in tax savings. Its team includes CPAs, tax specialists, engineers, technical writers, and architects who support federal and state R&D Tax Credit studies with technical activity analysis, qualified expense review, and detailed supporting documentation.

The 65% Rule Is Only the Starting Point  

The 65% contract research rule generally allows a taxpayer to include 65% of qualifying amounts paid or incurred to a nonemployee for qualified research performed on the taxpayer’s behalf.

That does not mean 65% of every contractor payment qualifies.

A better review sequence is:

•  Determine whether the contractor performed qualified research.
• Identify the portion of the payment tied to that research.
• Review whether the agreement supports contract research treatment.
• Apply the applicable percentage to the qualifying amount.

For example, if an invoice includes both experimental engineering and routine production support, only the portion tied to qualified research should be evaluated for the credit.

What Should Be Reviewed in a Contractor Agreement?  

An outsourced R&D tax credit review should consider more than the invoice description

Was the arrangement established before the research? 

The contract, statement of work, work order, or related agreement should show that the research arrangement existed before the qualified work was performed.

Was the research performed on the taxpayer’s behalf?  

The taxpayer should generally retain rights to the research results. Those rights do not necessarily need to be exclusive, but the agreement should support that the contractor was performing research for the taxpayer.

Who bore the financial risk?  

The payment structure matters. A company paying for the contractor’s research effort may be treated differently from an arrangement where payment is contingent only on successful completion of a specific result.



These details can affect whether the expense is treated as contract research.

Why Research Location Matters  

For the federal R&D Tax Credit, research generally must be performed within the United States, Puerto Rico, or a U.S. possession.

That means an Ohio company should determine where the actual research activity occurred, not just where the contractor’s headquarters are located.



A U.S.-based contractor may still perform some work overseas, so the physical location of the research should be reviewed when evaluating third-party research expenses.

Contractor Costs That May Need Separate Review  

Different contractor arrangements can produce different R&D credit results.

The contractor’s job title or contract name does not determine qualification. The actual technical work performed is what matters.

What Documentation Helps Support Contract Research Expenses?  

RCG Tax Partners’ R&D Tax Credit studies focus on connecting qualifying technical activity to supportable expenses. For contractor costs, useful records may include:

•  Executed agreements and statements of work
• Contractor invoices
• Project schedules
• Engineering or technical deliverables
• Test reports
• Prototype records
• Software development documentation
• Technical correspondence
• Records showing where the research was performed

The documentation should also help separate qualified research from routine consulting, installation, maintenance, training, production support, and other nonqualified work.

Economic Risk and Rights to the Research  

Contract research can become more complicated when both the taxpayer and contractor may have potential R&D Tax Credit considerations.

For the company paying the contractor, the analysis generally focuses on whether the research was performed on its behalf, whether it bore the appropriate economic risk, and whether it retained rights to the results.

The contractor may have a separate funded-research analysis based on its own agreement, financial risk, and rights.



This is why contract research should be reviewed as part of the broader R&D Tax Credit study rather than treated as a simple invoice percentage calculation.

FAQs About Contract Research Expenses  

Review Contract Research Before Filing  

Contract research expenses for the R&D Tax Credit require more than applying a 65% factor to outside contractor costs. Ohio businesses should review the technical work, contract terms, financial risk, rights to the results, research location, and expense allocation before including third-party costs in a claim.



RCG Tax Partners supports Ohio businesses with R&D Tax Credit studies that include technical activity analysis, qualified expense review, contractor cost evaluation, and detailed supporting documentation. RCG helps businesses and their CPAs connect qualifying research activity with the wages, supplies, and contract research expenses supporting the credit.