The Challenges of Funded Research in R&D Tax Credits

Does customer-funded work qualify for the R&D tax credit? Passing the four-part test is only the beginning. For businesses performing research for customers, contract terms can determine whether otherwise qualified activities are excluded under the funded research rules.

In this episode of Let’s Talk Tax, host Dave McGuire joins David Seibel, EA, and Tanner Niehaus, CPA, to explore two key considerations: whether the taxpayer bears economic risk and retains substantial rights to the research. They explain why customer-driven work is not automatically disqualified and discuss how payment terms, warranty provisions, and intellectual property rights can affect the analysis.

Through examples involving software development, manufacturing, contract manufacturing, and design-build projects, the conversation highlights both overlooked opportunities and common eligibility mistakes. The team also compares the research contract standards under Section 41 and Section 174, discusses outsourced foreign research, and considers the business tradeoffs of changing contract terms.

Listen to learn what CPAs and business owners should look for when evaluating R&D tax credit eligibility beyond the four-part test.