Energy Research Credit

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Internal Revenue Code (I.R.C.) § 41 provides taxpayers with a credit for energy research. The I.R.C. § 41 energy research tax credit is equal to twenty percent of payments made incurred in carrying on any trade or business of the taxpayer made to certain “energy research consortiums.” Energy research consortiums consist of organizations exempt from tax pursuant to I.R.C. § 501(a) that is organized and operated primarily to conduct energy research or exempt from tax pursuant to I.R.C. § 501(c)(3) that is organized and operated primarily to conduct energy research in the public interest.

The energy research tax credit is one hundred percent of payments to colleges and universities, federal laboratories, and small firms for energy research performed pursuant to a written contract. There are some restrictions on payments to small firms for energy research.

Energy Research

The term “energy research” is not defined in the tax code. Rather, the tax code merely states that the terms energy research “does not include any research which is not qualified research.”  Qualified research expenses can include wage costs, supply costs, contractor costs and certain computer rental expenses that the taxpayer paid or incurred for qualified services in carrying on the taxpayer’s trade or business. The two key terms are “qualified services” and “qualified research.”

Qualified Services

The term “qualified services” involves directly engaging in qualified research or engaging in the direct supervision or direct support of research activities that constitute qualified research. The term “direct supervision” means the immediate supervision of qualified research and the term “direct support” means services in the direct support of either persons engaging in actual conduct of qualified research or persons who are directly supervising persons engaging in the actual conduct of qualified research.

Qualified Research

The term “qualified research” includes research:

• with respect to which expenditures may be treated as expenses under I.R.C. § 174;
• which is undertaken for the purpose of discovering information that 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
• substantially all of the activities of which constitute elements of a process of experimentation for the purpose of achieving a new or improved function, performance, or reliability or quality.