{"id":8767,"date":"2026-10-27T15:23:50","date_gmt":"2026-10-27T14:23:50","guid":{"rendered":"https:\/\/leyton.com\/us\/?post_type=article&p=8767"},"modified":"2026-10-29T15:24:02","modified_gmt":"2026-10-29T14:24:02","slug":"contractor-or-supply-why-misclassified-vendors-costs-may-be-shrinking-your-rd-tax-credit","status":"publish","type":"article","link":"https:\/\/leyton.com\/us\/insights\/articles\/contractor-or-supply-why-misclassified-vendors-costs-may-be-shrinking-your-rd-tax-credit\/","title":{"rendered":"Contractor or Supply? Why Misclassified Vendors Costs May Be Shrinking Your R&D Tax Credit"},"content":{"rendered":"\n

Outside vendors are often coded as “contractors” by default. For many R&D costs, that label is wrong, and expensive.<\/strong><\/p>\n\n\n\n

Your engineers designed the part. A machine shop in Taiwan built it. Your team tested it in New Jersey. Chances are, your R&D Tax Credit counts that invoice as zero.<\/p>\n\n\n\n

When finance teams assemble an R&D claim<\/a><\/strong>, anything paid to an outside vendor tends to land in one bucket: “contractor.” No one questions it, because the label seems obvious.<\/p>\n\n\n\n

As a Qualified Research Expense (QRE), contract research costs count at just 65% of what you paid. If the work happened overseas, it counts at nothing.<\/p>\n\n\n\n

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Yet many of those invoices never paid anyone to do your research. They paid for something your team used to do the research itself.<\/strong><\/p>\n<\/blockquote>\n\n\n\n

One question separates the two: who did the experimenting?<\/strong> Answer it correctly, and costs that counted at 65%, or not at all, may be able to count in full.<\/p>\n\n\n\n

Stop Asking Who You Paid. Ask What You Bought.<\/h2>\n\n\n\n

The R&D Tax Credit treats outside spending in two very different ways. Contract research<\/strong> is a payment for someone else to perform qualified research on your behalf, and it counts at 65% under IRC \u00a741(b)(3). A supply<\/strong> is tangible property used and consumed in your own research, and it counts in full under \u00a741(b)(2)(C).<\/p>\n\n\n\n

The difference comes down to judgment versus execution. If the vendor proposed the design, weighed alternatives, and decided what worked, the vendor did the research. If your team defined the design, the vendor built it to spec, and your team tested it and decided what to change, your team did the research. The vendor supplied what you needed to do it.<\/p>\n\n\n\n

<\/div>\n\n\n\n
What to look for<\/td>Contract research (65% in the U.S.)<\/td>Supply (100%)<\/td><\/tr><\/thead>
Who defines the design<\/td>The vendor<\/td>Your team, through drawings, specs, or formulas<\/td><\/tr>
Who decides what to change<\/td>The vendor<\/td>Your team, based on your own testing<\/td><\/tr>
What you receive<\/td>Findings, designs, or reports<\/td>A physical item: a part, prototype, or batch<\/td><\/tr>
How the PO reads<\/td>A statement of work for design or development, billed hourly or by milestone<\/td>Parts built to your drawings, priced per unit or per build<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
<\/div>\n\n\n\n

A vendor’s price always includes its labor. That alone doesn’t make the purchase a service.<\/p>\n\n\n\n

The Difference Between 0% and 100%<\/h2>\n\n\n\n

Geography doesn’t change the test. It changes what’s riding on it.<\/p>\n\n\n\n

Research performed outside the U.S. is excluded from the credit entirely under \u00a741(d)(4)(F). A supply works differently. If your research happens in the U.S., it doesn’t matter where the part was made.<\/p>\n\n\n\n

<\/div>\n\n\n\n
How the cost is classified<\/td>U.S. vendor<\/td>Foreign vendor<\/td><\/tr><\/thead>
Supply used in U.S. research<\/td>100%<\/td>100%<\/td><\/tr>
Contract research<\/td>65%<\/td>0%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n
<\/div>\n\n\n\n

For a domestic vendor, the right classification raises that cost’s QRE by more than half. For a foreign vendor, it can turn an excluded cost into a fully qualifying one.<\/p>\n\n\n\n

Two recent shifts raise the stakes further:<\/p>\n\n\n\n