Direct Support in R&D
Understanding the critical link between support activities and Qualified Research Expenses (QREs) under IRS regulations.
The Meaning & Legal Context
In the context of U.S. R&D tax credit law (IRC Section 41), "Direct Support" refers to services performed by individuals who are not directly conducting the qualified research but whose activities are indispensable to the execution of that research. It acts as the bridge between raw effort and scientific advancement.
Crucially, these activities must constitute a "direct supervision" or "direct support" role. The IRS regulations explicitly include tasks such as cleaning equipment used for testing, compiling data for analysis, or machining prototypes. However, general administrative work—such as payroll, HR, or general facility maintenance—is strictly excluded. A clear "nexus" must exist: the support must be for the specific R&D activity, not the general operation of the business.
The 3 Pillars of Qualified Wages
Direct Support is one of three ways employee wages qualify. Hover to learn more.
1. Engaging in Research
The scientists, engineers, and coders directly formulating hypotheses, testing, and experimenting.
2. Direct Supervision
First-line managers overseeing the research. Note: High-level management usually does not qualify.
3. Direct Support
Immediate support services. E.g., a machinist creating a part for a prototype or a lab tech cleaning test beakers.
Why It Matters: The "Missed" Credit
Identifying Direct Support is vital for maximizing the claimable Qualified Research Expenses (QREs). Many companies claim the engineers but forget the support staff, leaving significant money on the table.
The chart illustrates a hypothetical scenario where capturing Direct Support wages increases the total Qualified Research Expenses by 20%.
Figure 1: Comparative QRE Analysis
Case Study: The Machinist Example
Distinguishing between General Production and Qualified Direct Support.
Select Role Context
Does the machinist's work qualify? Click to analyze the activity.
Select a scenario
See how the "Nexus" rule applies to the same job title.
Next Steps: Clarifying Direct Support
Expert Report: Maximizing Qualified Research Expenditures through Rigorous Direct Support Classification
I. Executive Summary: The Meaning and Criticality of Direct Support
Direct Support (DS) is a strictly defined component of Qualified Research Expenses (QREs) under the U.S. R&D Tax Credit, as governed by Internal Revenue Code (IRC) Section 41 and detailed in Treasury Regulation § 1.41-2(c)(3). The classification of DS wages is crucial for maximizing the tax credit base, as it encompasses technical labor that enables core research activities but does not involve the direct performance of qualified research itself. DS is defined as services provided in the direct support of persons who are either engaging in the actual conduct of qualified research or persons who are directly supervising those engaged in the research.1 This definition imposes a stringent “proximate nexus” test, meaning the support activity must have an immediate, essential, and functional link to the specific technical tasks being performed. This is the third pillar of qualified wage expenditures, alongside direct research performance and direct supervision.3
The strategic importance of accurately identifying and documenting DS wages is twofold: it expands the QRE base beyond the salaries of core scientists and engineers, and it provides a defensible means of capturing essential, non-overhead technical costs, such as technicians, specialized maintenance staff, or dedicated data clerks. However, the IRS rigorously excludes all services deemed general and administrative (G&A), financial, or generally supportive, classifying such activities as only indirectly beneficial to research.1 The strict regulatory language clarifies that this G&A exclusion applies regardless of whether the general administrative personnel are housed within the research department or in a separate unit, thereby emphasizing that the qualification hinges entirely on the function performed, not the organizational reporting structure.1 Failure to correctly categorize these activities—distinguishing immediate technical support from general corporate overhead—represents a primary area of risk during an IRS examination. For instance, a clear, qualifying example of Direct Support is the services of a clerk compiling raw experimental data extracted from testing runs performed by research scientists.1 This activity directly supports the researcher’s process of analyzing results derived from the qualified research.
Strategic Recommendations: Next Steps for Full Utilization of Direct Support
To fully clarify and utilize Direct Support wages, taxpayers must move beyond generalized cost allocations toward a prescriptive, project-based compliance model. The immediate next steps require institutionalizing a process that links wages to specific technical uncertainties:
- Conduct a Regulatory Mapping Audit: All employee support roles (e.g., technical assistants, documentation staff, specialized maintenance) must be immediately cross-referenced against the explicit qualified examples and exclusions provided in Treas. Reg. § 1.41-2(c)(3).1 The focus must be on verifying the strict proximate nexus.
- Implement Project-Level Time Tracking: It is imperative to adopt granular, real-time time tracking systems that link Direct Support wages directly to specific business components (technical projects).6 This implementation is crucial for meeting the heightened documentation requirements mandated for tax years beginning after 2024.7
- Develop Internal Control Documentation: A robust R&D Tax Policy Manual should be created to define qualified DS activities specific to the organization. This must be coupled with targeted, mandatory training for all supervisors to ensure accurate, contemporaneous time classification, bolstering audit readiness and demonstrating due diligence.
II. The Foundational Legal Context of Qualified Services
R&D Expenditures and the Three Pillars of Qualified Services
The ability to claim the Research and Development Tax Credit hinges upon the accurate identification of Qualified Research Expenses (QREs) under IRC § 41. Wages paid for qualified services represent the most significant category of QREs.3 Treasury regulations classify wages into three distinct, mutually exclusive categories that constitute qualified services:
- Engaging in Qualified Research: The actual performance of the technical work, such as brainstorming, technical problem-solving, designing experiments, or participating in concept development.4
- Direct Supervision: The immediate management of qualified research activities, typically performed by a scientist who directly supervises experiments but may not perform them.2
- Direct Support (DS): Services supporting the individuals described in the first two categories.2
A critical element influencing the total qualified wages is the “Substantially All” test, which is applied to employees whose duties involve both qualified and non-qualified activities. If 80% or more of an employee’s time is spent on qualified services (any combination of the three categories), then 100% of that employee’s wages are considered QREs. If the qualified portion is less than 80%, only the wages corresponding to the qualified hours are claimable. This calculation underscores the absolute necessity of precise and contemporaneous time tracking, particularly for DS personnel whose roles often blend administrative, production, and technical support functions.6
The Financial Significance of Direct Support Wages
From a cost strategy perspective, Direct Support wages often represent a broad and varied pool of expenditures that can substantially increase the total QRE base. While core R&D activities are limited to personnel directly solving technical uncertainty, DS captures the specialized technical staff required to execute the research infrastructure (e.g., specialized lab workers, prototype technicians, or employees dedicated to documenting specific technical processes).
When analyzed strategically, the inclusion of DS activities functions as an efficient mechanism for capturing secondary technical infrastructure costs that are indispensable to the research process but often overlooked if the focus remains solely on the salaries of primary scientists. Properly qualifying these wages ensures that essential labor costs—such as those associated with manufacturing a test jig or specialized maintenance of research equipment—are included. This systematic approach efficiently utilizes the regulatory framework to elevate the overall credit calculation by maximizing the total QRE base that might otherwise be inappropriately categorized as non-qualified administrative overhead.
III. Deconstructing Direct Support: Regulatory Definition and the Proximate Nexus Test
The Precise Language of 26 CFR § 1.41-2(c)(3) and Its Interpretation
Treasury Regulation § 1.41-2(c)(3) provides the legal foundation for Direct Support claims. The regulation states explicitly that DS means services provided in the direct support of persons who are engaging in the actual conduct of qualified research or who are directly supervising such conduct.1
This definition carries two critical regulatory stipulations that must be strictly adhered to:
- Exclusion of Supervision: Direct Support does not include supervision.1 Supervisory services must be separately qualified under the “Direct Supervision” provision (paragraph (c)(2)).
- Exclusion of G&A: The definition explicitly excludes general administrative services or other services that are only indirectly of benefit to research activities.1 This prohibition is applied uniformly, irrespective of whether the general administrative personnel are assigned to the research department or a separate corporate department.1
The Proximate Nexus Test: Supporting the Person vs. Benefiting the Research
The determination of whether a service constitutes qualified Direct Support rests entirely on verifying the proximate nexus. This is the audit test utilized by the Internal Revenue Service (IRS). The service must be so closely connected in time, location, and function that it is indispensable to the execution of a specific qualified research activity, focusing on support for the person performing the technical function.
The IRS maintains an organizational blindness in its application of the G&A exclusion. Because the regulation explicitly denies qualification for G&A services even if the personnel report directly to R&D management 1, reliance on organizational reporting structure is not a valid defense mechanism. Examiners are trained to disregard departmental placement and focus strictly on the function performed. Taxpayers seeking to qualify wages based solely on the fact that an employee reports to the Vice President of R&D, for instance, are immediately exposed to vulnerability if the underlying activity remains G&A in nature (e.g., supervising financial matters for the department).5
Delineation: Qualified Activities Backed by Regulation and Precedent
The regulations offer definitive examples that guide the classification of DS activities. These examples serve as a critical benchmark for developing internal compliance policies:
- Technical Fabrication: The services of a machinist for machining a part of an experimental model used in qualified research.1 The rationale is the direct link to the creation of a research prototype or component.
- Technical Documentation: An employee typing reports describing laboratory results derived from qualified research.1 This activity directly captures the technical outcome necessary for analysis and documentation of the research process.
- Data Management: The services of a clerk compiling raw research data.1 This constitutes the direct preparation of specialized data necessary for the researcher’s analytical process.
- Specialized Maintenance: A laboratory worker cleaning equipment used in qualified research.1 This activity is necessary maintenance specific to the R&D apparatus.
Analysis of Explicit Regulatory Exclusions
The Treasury Regulations also provide explicit examples of services that are strictly excluded, serving as boundary markers that compliance efforts must respect:
- Services of payroll personnel in preparing salary checks of laboratory scientists.1
- Services of an accountant for accounting for research expenses.1
- Services of a janitor for general cleaning of a research laboratory.1
- Services of officers engaged in supervising financial or personnel matters.1
The underlying principle connecting all excluded services is the Fungibility Test. All excluded activities (payroll, general accounting, standard facility cleaning) are functions required for the general operation of the business, regardless of whether qualified R&D is conducted. The IRS typically argues that such costs would exist even if the research activity ceased, thereby failing the necessary and direct benefit test. To successfully defend a DS claim in an audit, the taxpayer must demonstrate that the support activity is unique to the R&D process and requires specialized technical input that would not exist in the general business operation (e.g., specialized calibration of research equipment versus standard office maintenance).
IV. Advanced Compliance, Documentation, and Audit Defense Strategies
The Documentation Mandate: Linking Time to Technical Uncertainty
Accurate, granular, and real-time records form the essential foundation for defending any R&D expense claim.6 For Direct Support wages, the documentation mandate requires more than simple time logs; it necessitates establishing the proximate nexus through written evidence.
Documentation must not only show the time spent but also define what qualified service was supported. This requires detailed daily or weekly narratives that link the specific employee hours to a qualified research task within a specific project (business component).6 These time tracking records must clearly distinguish between qualified and non-qualified activities. For example, a machinist’s time must be segregated between fabricating an experimental component (qualified DS) and performing routine maintenance on a production line (non-qualified G&A).
Navigating the New Reporting Requirements (Tax Year 2025 and Beyond)
Compliance strategies must immediately pivot to address the unprecedented level of granularity demanded by new IRS reporting requirements. Starting with tax years beginning after December 31, 2024, businesses must report specific information, including Direct Support wages, for each business component that performs qualified research activities.7
This mandate transforms the documentation burden from a high-level, aggregate compliance exercise into a requirement for detailed, project-specific accounting. Enterprise Resource Planning (ERP) and time-tracking systems must be adapted to allocate specific employee time, including minutes, to distinct project identification numbers. This organizational change is mandatory for future filings. The IRS’s new demand for pre-disclosed, project-level data—specifically showing the DS wage amount linked to $Project\_A$—provides examiners with precise data points for highly targeted audits. This fundamentally shifts the burden of proof, requiring taxpayers to demonstrate detailed, documented linkage at the project level before the audit even commences. Thus, any deficiency in internal documentation becomes an immediate and potentially catastrophic liability under the new regime.
Qualified and Excluded Direct Support Activities
A comprehensive view of Direct Support requires distinguishing permissible activities from excluded G&A services based on the strict nexus criteria:
Table 3: Qualified vs. Non-Qualified Direct Support Examples
| Qualified Direct Support Activity (Specific Nexus) | Non-Qualified/Excluded Activity (General/Indirect) | Regulatory Rationale | Source |
| Machinist fabricating specialized tooling or fixtures solely for prototype testing. | Machinist performing setup, maintenance, or calibration on general production machinery. | Direct creation of experimental component versus routine manufacturing upkeep. | 1 |
| Secretary typing lab reports documenting failed experimental results. | Secretary preparing presentation slides for the quarterly R&D financial review meeting. | Documentation of technical outcome versus general administrative/financial supervision. | 1 |
| Laboratory worker cleaning specialized optical instruments used in quantum research. | Janitor performing general floor cleaning and waste removal in the R&D office space. | Specialized maintenance of research equipment versus general facility upkeep. | 1 |
| Clerk compiling and verifying the accuracy of raw sensor data gathered from a test run. | Payroll personnel generating weekly paychecks for the research team. | Direct handling of research data versus general personnel management. | 1 |
Defending Ambiguous Roles
For specialized roles that do not fit the common examples of machinist or secretary, the qualification must be determined by the function’s direct dependency on the research:
- IT Support: General network maintenance or standard corporate IT help-desk services are always considered G&A. However, highly specialized IT support, such as the maintenance and security of dedicated server farms running proprietary R&D simulation software, or securing highly sensitive, proprietary lab data networks, may qualify as DS if the service is uniquely required by the research activity.
- Specialized Procurement: General purchasing agents or supply chain managers are excluded. Qualification may extend to a technical liaison whose primary role is procuring highly specialized, custom-order raw materials or unique equipment specifically required for prototype development and testing, provided those materials or equipment are not intended for general production use.
V. Strategic Next Steps: Institutionalizing Compliance and Optimization
To transition from mere compliance to optimized, defensible utilization of Direct Support wages, organizations must implement comprehensive institutional controls and adopt advanced technology.
Policy Development and Targeted Training
Establishing clear internal controls is paramount. An R&D Tax Policy Manual should be drafted to definitively articulate the scope of Direct Support using the “support the person” criterion mandated by the regulation.1
Crucially, mandatory training must be implemented for all supervisors and managers of research support personnel. Since Direct Support encompasses services for both active researchers and those directly supervising them 2, supervisors must be trained to understand the strict exclusions of G&A and correctly categorize their support staff’s time. The ability to demonstrate a systematic, company-wide methodology for defining, documenting, and calculating QREs significantly strengthens audit defense. This consistency proves due diligence and refutes the potential auditor argument that claims are based on arbitrary or inconsistent judgment calls by individuals.
Technology and Optimization
The future of R&D tax compliance is inextricably linked to technological precision. Investment in or upgrading existing time tracking and ERP technology is required to meet the stringent, project-level compliance demands driven by the 2025 reporting rules.6 The system must be capable of generating audited reports that segregate DS wages by business component and clearly define the qualified task performed.
Furthermore, internal procedures must mandate real-time data input. Relying on memory or estimation for reconstructing time logs is viewed skeptically by the IRS.6 Implementation of procedures that require contemporaneous time entry and managerial verification maximizes the defensibility of the DS claim.
Proactive Risk Management and IRS Guidance
For roles where the qualification of DS wages is genuinely ambiguous or represents a material portion of the total QRE base, organizations should adopt a proactive risk management strategy. This involves not relying on internal interpretation but engaging specialized tax counsel for review and formal determination.
For particularly high-cost or unique DS activities that do not neatly fit the regulatory examples, organizations should consider seeking formal guidance from the IRS through mechanisms such as a Private Letter Ruling (PLR) or a Pre-Filing Agreement (PFA). While securing such guidance incurs costs, it provides critical certainty. Obtaining official IRS determination on the qualification of unique or material Direct Support wages effectively locks in the deductibility of those expenses, thereby mitigating multi-year audit exposure and ensuring consistent, defensible claims.
Table 4: Documentation and Compliance Checklist for Direct Support Wages
| Compliance Requirement | Best Practice / Action Item | Regulatory Anchor / Driver | Risk Mitigation |
| Contemporaneous Capture | Utilize dedicated digital tools; require time entry and activity descriptions daily or weekly. | Proof of time split and link between wages/tasks.6 | Prevents IRS disallowance based on insufficient substantiation. |
| Business Component Linkage | Time tracking must reference the Project ID or Business Component receiving the support. | New 2025 reporting mandate for Direct Support wages.7 | Mandatory for future filings; critical for targeted audit defense. |
| Activity Narrative/Nexus | Require narratives that explain which specific research activity was supported (e.g., prototype testing, data compilation). | Establishing the Direct/Proximate Nexus required by Treas. Reg. § 1.41-2(c)(3).1 | Converts generic “support hours” into legally defensible qualified time. |
| Policy Enforcement | Establish clear review processes where direct supervisors verify DS classification before payroll submission. | Mitigating exposure to claims based on generalized administrative tasks.2 | Ensures consistency and reduces errors in classifying G&A. |
VI. Conclusion: Sustaining a Defensible Direct Support Strategy
Direct Support wages represent a critical yet frequently challenging component of the R&D tax credit framework. The qualification rests entirely on meeting the stringent proximate nexus test, proving that the service directly supports the individual performing or supervising qualified research, rather than merely benefiting the general business operation. The regulatory distinction between qualified technical assistance (e.g., specialized lab cleaning, prototype machining) and excluded G&A (e.g., general cleaning, accounting for expenses) is absolute and functional, overriding organizational placement. Compliance success now hinges on the ability to substantiate the claim using granular, contemporaneous documentation that clearly segregates qualified technical support from administrative overhead at the project level. Immediate action is required to update internal systems and training protocols to align with the escalating IRS demand for project-level reporting granularity, ensuring Direct Support wages remain a robust and defensible QRE component for future filings.
Are you eligible?
Why choose us?
Pass an Audit?
What is the R&D Tax Credit?
The Research & Experimentation Tax Credit (or R&D Tax Credit), is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return. For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%. Click here to learn more.
Never miss a deadline again
Stay up to date on IRS processes
Discover R&D in your industry
R&D Tax Credit Preparation Services
Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.
If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.
R&D Tax Credit Audit Advisory Services
creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.
Our Fees
Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/
Choose your state
