The term “qualified research” means research which is undertaken for the purpose of discovering information which is technological in nature, and the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and relates to:

Certain purposes that are not qualified include style, taste, cosmetic, or seasonal design factors. The definition is relatively broad and encompasses such activities as:

Qualified research expenses (QREs) are amounts the taxpayer pays or incurs during the tax year “in carrying on any trade or business” (including certain start-up costs) of the taxpayer for: in-house research expenses, which consist of certain wages and supplies, and contract research expenses, i.e., 65% of amounts paid to certain nonemployees, and 100% of the taxpayer's expenditures to eligible small businesses, universities, and federal laboratories for qualified energy research. (Code Sec. 41(b); Reg § 1.41-2)

Note: No deduction is allowed for that portion of the qualified research expenses or basic research expenses otherwise allowable as a deduction for the tax year, which is equal to the amount of the research credit determined for the tax year (Code Sec. 280C(c)(1)). In other words, a taxpayer must reduce his deduction for research or experimental expenditures (or qualified research expenses or basic research payments) by 100% of the amount of the research credit determined for the year.

Similarly, if the taxpayer capitalizes, rather than deducts the expenditures, the amount chargeable to the capital account is reduced by 100% of the amount of the credit for the tax year over the amount allowable as a deduction for qualified research expenses or basic research expenses (determined without regard to the reduced deduction, discussed above).