Research Credit


Research credit- when wages do not qualify?
Based on a recent court decision, an s corporation claimed the research credit under Section 41 for wages paid to two of its shareholders, of whom one was the CEO and president of the company and the second one was a vice president. None of these shareholders had formal education or training in any physical or biological science or engineering.
The court held that none of the two shareholders wages qualify for the research credit from the reason that their wages does not constitute qualified research activities. According to the court point of view none of the two shareholders were directly engage in qualified research activities or in the direct supervision of research activities. A qualified research activities is occurred when a scientist conduct experiment in a laboratory or been supervised directly in the laboratory. Both the scientist and his supervisor’s wages are qualified research expenditure. However, wages of the CEO and its vice president who are not the immediate supervision or the first line management of the research but a higher management level to whom first line management reports, are not qualified research wages.