Shared Research Rights: What They Mean for the R&D Tax Credit
By Archita Roy, Tax Staff Accountant
Your customer owns the finished product. Does that mean your business cannot claim the R&D tax credit? Not necessarily. The rights you keep—and the terms for getting paid—both matter.
This article looks at the contractor: the business performing research for a customer and hoping to claim the federal R&D tax credit. Under the “funded research” rules, two questions decide whether your costs can count.
Question 1: Did You Keep Meaningful Rights?
You need a real contractual right to use the actual research results in your own business, without paying the customer for that right. If you would have to pay to use the results, you have not kept substantial rights.
You do not need exclusive rights, and you do not need to be a legal co-owner. But the experience your team picks up along the way is not enough on its own. Know-how in general is an incidental benefit, not a substantial right.
Question 2: Do You Get Paid Even if the Research Fails?
This is a separate test. If you are entitled to payment whether or not the research succeeds, that payment is generally treated as funding, and it reduces the expenses you can claim. Payments that genuinely depend on successful results are not treated as funding under this rule.
Calling a contract “fixed price,” or facing the ordinary risk of cost overruns, does not settle the question by itself. The full terms of the agreement control.
Two Quick (Hypothetical) Examples
Example A: An engineering firm develops a new process. The customer receives a nonexclusive license, and the firm keeps a royalty-free right to reuse the technology it developed. Sharing rights does not, by itself, disqualify the firm. It still has to look at the payment terms to see whether the work was funded.
Example B: The customer gets the exclusive right to exploit all results, and the firm keeps no meaningful right to use them. Here the firm’s expenses are excluded, even if its payment depends on success.
Notice the difference: it is the rights the contractor actually keeps, not just who holds the ownership label, that drives the result.
What About the Customer?
If the contractor cannot claim the work, that does not automatically mean the customer can. The customer has its own test under the contract research rules, including whether it agreed in advance, has rights to the results, and must pay even if the research is unsuccessful.
A Practical Checklist
- Read all related agreements together: the master agreement, statements of work, IP terms, and payment clauses.
- Identify which research results you can actually reuse, as opposed to general experience.
- Check what happens to payment if the research does not succeed.
- Keep records showing your qualifying activities and costs.
- One last point: these are only the funded-research questions. The work and the expenses must still meet the other federal R&D credit requirements.
- Before signing your next development agreement, have your tax advisor and legal team review the research-rights and payment provisions together.
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