Can Rental or Lease Costs of Computers Be QREs for the Federal R&D Credit?

Can Rental or Lease Costs of Computers Be QREs for the Federal R&D Credit?

If your company rents or leases computers (including cloud computing services) and you’re wondering if those costs can count toward your Qualified Research Expenses (QREs) for the federal R&D tax credit, here’s what you need to know:

1. What Does the Law Say?

IRC § 41(b)(2)(A)(iii)
The tax code specifically says you can include “amounts paid or incurred to another person for the right to use computers in the conduct of qualified research” as QREs. In other words, if you’re paying to use computers for R&D, those costs might count.

2. What Are the Main Requirements?

Treas. Reg. § 1.41-2(b)(4) spells out three big rules:

• The computer can’t be yours. It must be owned and run by someone else (like a cloud provider).

• It can’t be on your premises. The computer has to be off-site.

• You can’t be the only one using it. You can’t be the “primary user”-it has to be a shared resource (again, think cloud computing).

3. The Use Has to Be for Qualified Research

IRC § 41(d) & Treas. Reg. § 1.41-4
The costs only count if the computers are being used for “qualified research.” That means:

• You’re trying to discover something new that’s technological in nature.

• You’re developing or improving a product or process.

• There’s a process of experimentation-so, not just routine work or maintenance.

4. Keep Good Records

You’ll need to show proof that the rental or lease costs were really for R&D. Save contracts, invoices, and logs showing how the computers were used.

5. Don’t Forget the Base Period

If you start including these costs as QREs, you may need to update your “base period” calculations for the credit. (See Regs. § 1.41-3(d)(1) and § 1.41-9(c)(2) for details.) Basically, you need to be consistent in how you calculate your credit from year to year.

6. What Doesn’t Count?

If you’re just using the computers for routine hosting, storing files, or running finished products, those costs don’t qualify.

7. Documentation Best Practices

Proper documentation generally means keeping contracts, invoices, logs so that you can reference as support if/when needed.

Tax Nerd references:

Computer is owned/operated by someone else - Can’t be your own server/computer (see Treas. Reg. § 1.41-2(b)(4)

Off your premises - Must be off-site/cloud (See Treas. Reg. § 1.41-2(b)(4)

Not the primary user - Must be shared (like in the cloud) (See Treas. Reg. § 1.41-2(b)(4)

Directly tied to R&D - Must be for qualified research, not routine use (See IRC § 41(d); Treas. Reg. § 1.41-4)

Adjust base period if needed - Update past years if you start claiming these costs (See Regs. § 1.41-3(d)(1); § 1.41-9(c)(2))

In summary:

If you’re renting or leasing computers (or using the cloud) for real R&D work, and you meet the requirements above, those costs can likely be included as QREs for the federal R&D credit. Just make sure you have the documentation to back it up, and check your base period calculations if you’re adding these types of expenses for the first time.