Directly Supporting Research

Directly Supporting Research refers to the essential services performed by employees that facilitate the technical execution of qualified research or its immediate supervision, excluding general administrative tasks. In the New York State tax environment, these activities constitute qualified research expenditures when they provide non-incidental, proximate assistance to the experimental process or the first-line management of technological innovation.

The concept of Directly Supporting Research (DSR) is not merely a peripheral accounting category but a core pillar of the New York State (NYS) Research and Development (R&D) tax incentive structure. For high-growth industries across the Empire State—ranging from the biotechnology corridors of New York City and Long Island to the semiconductor hubs in the Capital Region—the ability to accurately identify and substantiate DSR often determines the ultimate fiscal viability of a research project. New York law, specifically through the Excelsior Jobs Program and the Life Sciences Research and Development Tax Credit, relies heavily on the definitions established under Internal Revenue Code (IRC) Section 41. By adopting these federal standards, the state ensures a degree of uniformity for taxpayers while simultaneously introducing unique regional qualifiers that incentivize local job creation and “green” innovation.

The Regulatory and Statutory Nexus: Federal Baseline and State Adoption

To understand Directly Supporting Research, one must first examine the legal architecture that binds New York State tax law to the federal Internal Revenue Code. New York does not maintain a completely independent definition of R&D activities; instead, it incorporates the federal definitions of qualified research expenses (QREs) as the primary engine for its own credits.

The Federal Foundation: IRC Section 41(b)(2)(B)

The term “qualified services” is the statutory gateway through which DSR enters the tax calculation. Under IRC Section 41(b)(2)(B), qualified services include not only the direct conduct of research but also the “direct supervision” and “direct support” of such research. The federal regulations, which New York tax examiners follow closely, define direct support as services performed by an individual in the direct assistance of either the persons engaging in the actual conduct of qualified research or the persons directly supervising them.

The distinction between “direct” and “indirect” is the most scrutinized aspect of this definition. Indirect services, such as general administrative (G&A) functions, human resources, payroll, and general janitorial work, are expressly excluded from the credit. For a service to be considered “direct support,” it must possess a functional proximity to the experimental process. The IRS Audit Techniques Guide provides specific examples that have become the gold standard for New York taxpayers: a machinist who machines a part of an experimental model, a laboratory worker who cleans equipment used in qualified research, or a clerk who compiles research data.

New York State Tax Law and Article 9-A Integration

New York State Tax Law Section 210-B, subdivision 22, and Section 606(qq) provide the state-level authorization for the Excelsior R&D credit and the Life Sciences credit, respectively. These provisions mandate that the credit be calculated based on the portion of the federal R&D credit that is attributable to New York State. This creates a “flow-through” effect where any activity deemed “Directly Supporting Research” at the federal level is eligible for the New York credit, provided the labor is performed within the state’s borders.

This legislative synergy means that New York taxpayers must navigate a dual-layer compliance environment. They must satisfy the IRS’s “Four-Part Test” while simultaneously meeting New York’s programmatic requirements, such as the job creation thresholds required under the Excelsior Jobs Program.

Deconstructing the Categories of Qualified Services

The New York State Department of Taxation and Finance (DTF) and Empire State Development (ESD) recognize three tiers of research-related labor. Understanding the role of DSR requires placing it within this broader labor hierarchy.

Labor Category	Definition in NYS Context	Typical Roles	Impact on Credit Calculation
Direct Conduct	The hands-on execution of experimentation or software coding.	Scientists, Software Engineers, Chemists	High density of qualified hours; primary focus of the “Four-Part Test.”
Direct Supervision	First-line management of technical staff; immediate oversight of lab results.	Lab Managers, R&D Directors, CTOs	Qualified if management is technical and proximate; exclude “high-level” executives.
Direct Support	Essential assistance that facilitates the research environment or data integrity.	Machinists, Lab Technicians, Technical Clerks	Often overlooked; requires rigorous documentation of the “direct” link to research.
Indirect Support	Support of the business as a whole rather than specific R&D projects.	HR, Payroll, Legal (non-patent), Janitorial	Ineligible for both federal and New York R&D credits.

The Role of the Technical Machinist

In New York’s robust manufacturing sector—particularly in aerospace and medical device fabrication—the machinist is often the quintessential provider of DSR. If a machinist is tasked with creating a prototype of a new turbine blade or a surgical instrument that has never been built before, their work is inherently experimental. Even though the machinist may not be “discovering” the scientific principles behind the design, their labor is a direct and necessary input to the testing phase. If the prototype fails and a new design is required, the machinist’s second and third iterations remain qualified as DSR because they facilitate the ongoing process of experimentation.

The Clerical and Data Entry Nexus

A common misconception in the New York business community is that clerical work can never qualify for the R&D credit. However, the guidance provided in TSB-M-00(2)I and federal Treasury Regulation § 1.41-2(c)(3) clarifies that certain clerical activities are eligible if they are “in support of” the research. This includes:

• Typing laboratory reports that document the results of a specific experiment.
• Compiling raw data from experimental runs into a structured format for analysis by the research team.
• Maintaining a specialized technical library or database that is used exclusively for R&D purposes.

The critical qualifier here is that the clerk’s work must be project-specific. General bookkeeping or invoicing for an R&D department does not meet the “direct” threshold. The documentation must show that the clerk’s output was an integral part of the technical record-keeping of the research itself.

New York State Revenue Office Guidance: The QETC and Excelsior Standards

The New York State Department of Taxation and Finance has issued several technical memoranda that refine the application of R&D definitions. For many small-to-mid-sized tech firms in New York, the Qualified Emerging Technology Company (QETC) tax credit was a primary incentive, and its legacy continues to influence current guidance for the Excelsior and Life Sciences programs.

TSB-M-00(2)I and the Definition of R&D Activities

In TSB-M-00(2)I, the state clarifies that R&D activities include the “design and development of prototypes and processes.” The memorandum explicitly excludes non-technological activities such as quality control, routine product testing, and market research. This creates a specific hurdle for DSR: the support work must be tied to an “experimental” activity rather than a “routine” one.

For a New York business, this means that a lab technician cleaning equipment used for routine quality checks on a finished product line is not performing DSR. However, that same technician cleaning equipment used in a series of chemical trials to develop a new polymer would be performing DSR. The nature of the underlying activity—experimental versus routine—dictates the eligibility of the support labor.

Integration with the NSF Survey of R&D Funds

A unique aspect of New York’s R&D tax landscape is its reliance on the National Science Foundation (NSF) Business Research and Development Survey (BRDS). To qualify as a QETC, a company must demonstrate that its ratio of “research and development funds” to net sales meets certain averages. The state’s definition of these funds explicitly includes “expenditures paid or incurred in the conduct of research and development activities.”

This inclusion creates a direct link between DSR and a company’s eligibility for several state-level incentives. If a company fails to include its qualified support labor in its R&D fund calculation, it might fall below the required ratio (historically around 3.1% to 6% depending on the year), thereby losing its QETC status and all associated credits. Therefore, the identification of DSR is not just about the value of the credit itself but about maintaining the company’s status as a “strategic industry” firm in the eyes of the state.

The “Four-Part Test” as Applied to Supporting Roles

Every New York R&D credit claim must survive the scrutiny of the “Four-Part Test,” which serves as the filter for what constitutes “qualified research.” Supporting roles must be evaluated against these four criteria to ensure their inclusion is defensible.

Permitted Purpose

The research must be conducted to create a new or improved business component’s functionality, performance, reliability, or quality. For a DSR role, the labor must be instrumental to this improvement. If a technician is setting up a stress-test rig for a new composite material, their purpose is directly linked to proving the “performance” and “reliability” of that material.

Elimination of Uncertainty

The activity must aim to discover information that would eliminate uncertainty regarding the capability, method, or design of the business component. DSR roles facilitate this by handling the logistics of the uncertainty-reduction process. A software tester who is running “edge case” scenarios on a new encryption algorithm is helping to eliminate uncertainty about the algorithm’s “method” and “capability.” This support is distinct from routine software maintenance because it occurs during the development phase before the product is “packaged and ready for sale.”

Process of Experimentation

The work must involve a systematic process of evaluating alternatives, such as modeling, simulation, or systematic trial and error. DSR roles are often the primary actors in the “trial” and “error” phases. In a laboratory setting, the individuals who prepare different chemical concentrations for a series of tests are enabling the process of experimentation. Without their “direct support” in preparing these alternatives, the primary researcher could not conduct the systematic evaluation.

Technological in Nature

The research must rely on the principles of physical science, biological science, computer science, or engineering. DSR must occur within these fields. New York state guidance in Form DTF-621-I lists specific technologies that qualify, such as metal alloys, thin films, biotechnology, and signal processing. If the support staff is working in a marketing department or a social science unit, their labor is excluded, as New York expressly follows the federal exclusion of research in the social sciences, arts, or humanities.

Programmatic Application: The Excelsior Jobs Program

The Excelsior Jobs Program is New York’s premier economic development tool. It offers five fully refundable tax credits, including the Excelsior Research and Development Tax Credit. For businesses in the program, DSR is a critical component of both the credit value and the job creation requirements.

Credit Thresholds and Enhanced Rates

The standard Excelsior R&D credit is 50% of the federal R&D credit portion attributable to NYS, capped at 6% of the state-based QREs. However, the program incentivizes specific state priorities through enhanced rates.

Project Category	Max R&D Credit Rate (as % of NY QREs)	Core Strategic Industries
Standard Project	6%	Manufacturing, Software, Financial Services Back Office
Semiconductor Supply Chain	7%	Integrated Circuit Fabrication, Materials Suppliers
Green Project / Green CHIPS	8%	Clean Energy, Renewable Energy Storage, GHG Reduction

For a “Green Project,” DSR might involve technicians who are monitoring the emissions-reduction efficiency of a new industrial process. If the project aims to reduce greenhouse gases, the support staff who manage the specialized sensors and data logging equipment are performing DSR that qualifies for the enhanced 8% rate.

The Net New Job Requirement

To remain in the Excelsior Program, firms must meet and maintain job thresholds. For scientific R&D firms and software development firms, the threshold is often five net new jobs. The ability to categorize support roles—such as specialized lab technicians or software QA testers—as “R&D jobs” allows a firm to meet these targets while focusing on technical growth. If these roles were viewed merely as “administrative,” the firm might fail its annual employment audit, leading to a recapture of its tax benefits.

The Life Sciences Research and Development Tax Credit

The Life Sciences R&D Tax Credit is a highly targeted program designed to bolster the biotech ecosystem in New York. Unlike the Excelsior program, which is broader in scope, this credit is specifically for “new” life sciences businesses.

Tiered Rates and Employee Count

The credit is fully refundable and tiered based on the company’s size:

• 15% of NYS R&D expenditures for companies with 10 or more employees.
• 20% of NYS R&D expenditures for companies with fewer than 10 employees.

This credit is capped at $500,000 per year for a maximum of three years. In the life sciences sector, DSR often constitutes a significant portion of the total QREs. The work of laboratory assistants who handle biological samples, manage bioreactors, or conduct DNA sequencing support is essential. For a pre-revenue biotech startup in New York City, receiving 20% of these support wages back in cash can be the difference between reaching a Phase II trial and running out of capital.

Exclusions and Local Nuances

New York’s Life Sciences credit specifically excludes “contract research expenses” from the state-level calculation, even though they are included at the federal level. This places even greater emphasis on in-house Directly Supporting Research. Because companies cannot claim third-party contract work, they are incentivized to hire their own technicians and support staff within New York. This policy effectively forces the “direct support” labor to be localized, reinforcing the state’s goal of building a permanent life sciences workforce.

Qualified Research Expenses (QREs) for Supporting Roles

When calculating the R&D credit, New York businesses must aggregate three types of in-house research expenses: wages, supplies, and computer costs. DSR roles can generate expenses in all three categories.

Wages for Qualified Services

Wages are typically the largest component of any R&D claim. For DSR personnel, the “substantially all” rule (also known as the 80% rule) is a critical planning tool. If an employee spends at least 80% of their time performing, supervising, or directly supporting qualified research, 100% of their W-2 wages can be included in the QRE calculation.

If a lab technician spends 85% of her time on DSR (cleaning experimental gear, documenting trials) and 15% on general office tasks, her entire salary is a QRE. However, if she spends only 70% on DSR, the company can only include that 70% portion. For many New York firms, managing the schedules of support staff to hit that 80% threshold can significantly increase the value of the credit.

Supplies Used in the Conduct of Research

Supplies are defined as tangible property, other than land or depreciable property, that is used in the performance of qualified services. For DSR roles, this includes the materials they consume while supporting the research. Examples include:

• Chemicals and reagents used by a technician during experimentation.
• Raw materials used by a machinist to build a prototype.
• Extraordinary utilities (such as high-voltage electricity for a specific experimental rig) that are “directly” supporting the research.

General office supplies, such as paper and pens for the HR department, are excluded. The supplies must be consumed in the “experimental or laboratory sense” to be eligible.

Computer and Cloud Hosting Costs

In the digital age, “direct support” often takes the form of cloud computing. New York guidance aligns with federal rules allowing the inclusion of costs for the “right to use computers” in the conduct of qualified research. This includes:

• Cloud hosting costs (e.g., AWS, Azure) used by developers to run experimental code or simulations.
• Rentals for off-premise computers used for data processing of R&D results.

To qualify, the computers must not be located on the taxpayer’s site, must be owned by another party, and the taxpayer must not be the primary user of the server. In a “Directly Supporting” context, the IT staff who configure and manage these specific R&D cloud instances are providing a qualified service.

Documentation and Substantiation: The Audit Defense Strategy

New York’s Department of Taxation and Finance is known for its rigorous field audits, particularly for corporate franchise tax and sales tax. R&D credits are a frequent target for “desk audits,” which rely on computer-supported systems to select candidates based on high refund claims.

Contemporaneous Records and the Burden of Proof

Taxpayers must provide proof that the work occurred in the fiscal year being claimed and that it met the technical requirements. For DSR, where the job title might not scream “R&D,” the documentation must be especially robust.

Required Documentation	Specific Application to DSR	Best Practice Example
Project Descriptions	Must explicitly mention the support activities required for the project’s success.	“Project X required 200 hours of custom fabrication of heat shields to test thermal resistance.”
Timesheets	Must break down time by project and by “service type” (Conduct, Supervision, Support).	Employee Y: “8 hours – Data entry for Bio-Trial 402.”
Organizational Charts	Must show the reporting line between the support staff and the technical lead.	Lab Technician reporting directly to the Principal Investigator.
Experiment Logs	Should note the presence and contribution of support personnel during trials.	“Test 14B: Equipment set up by Technician A; results recorded by Clerk B.”
Purchase Invoices	For supplies used by support staff during the R&D process.	“Purchase of 50 lbs of aerospace-grade aluminum for prototype fabrication.”

The “Moore” Warning and Federal Precedent

The 2023 Tax Court case Moore v. Commissioner underscores the importance of substantiation. The court disallowed research credits because the taxpayer could not prove that the activities of its top executives constituted a process of experimentation. For New York businesses, the lesson is clear: even if an employee is “Directly Supporting” research, their wages will be disallowed if their time is not tracked with project-specific detail. Estimations after the fact are rarely accepted by state or federal auditors.

Statistical Overview: The Fiscal Context of NY R&D Credits

Understanding the scale of R&D investment in New York provides insight into why the state maintains such strict guidance. In State Fiscal Year (SFY) 2023-24, New York collected $103.3 billion in taxes, with business taxes accounting for $25.6 billion.

The state’s tax expenditure reports highlight the significance of business incentives. While individual credits like the Excelsior R&D credit are often subject to annual caps, their total impact on the state’s budget is substantial.

New York State Tax Collections (SFY 2020-2024)

Tax Category	2020 (Billions)	2021 (Billions)	2022 (Billions)	2023 (Billions)	2024 (Billions)
Personal Income Tax	$53.7	$55.0	$70.7	$58.8	$53.8
Business Taxes	$9.3	$11.8	$19.3	$26.5	$25.6
Sales and Use Tax	$16.0	$15.3	$18.8	$20.0	$20.7
Total Collections	$82.9	$85.5	$113.1	$108.6	$103.3

The volatility in Personal Income Tax (PIT) receipts and the steady growth of Business Taxes (until the slight dip in 2024) suggest that New York is increasingly reliant on its corporate sector for revenue stability. This fiscal reality drives the state’s “strict accountability standards” mentioned in ESD materials. New York wants to ensure that every dollar of the $3.1 billion lifetime value of the Excelsior Program is truly supporting innovation and job growth.

Industry-Specific Case Studies: Applying DSR

To further clarify the meaning of “Directly Supporting Research,” we can examine how it applies across four key New York industries.

Case Study 1: The Rochester Precision Manufacturer

The Scenario: A manufacturer of specialized lenses for space telescopes is attempting to develop a new method for polishing glass that reduces aberrations by 15%.

Supporting Roles:

• Technician A: Manages the specialized chemical bath used in the experimental polishing process. Their work is DSR because they are maintaining the experimental environment.
• Technician B: Calibrates the laser-measuring devices after every experimental run to ensure data accuracy. This is DSR as it is essential to the “Process of Experimentation.”
• Administrative Assistant: Spends 90% of her time typing the highly technical grant applications and project reports required by NASA for this specific R&D project. Under the “substantially all” rule, her entire salary qualifies as DSR.

The Result: The company can include 100% of these individuals’ wages in their QETC or Excelsior R&D claim, provided they have project-specific logs.

Case Study 2: The Buffalo Green Tech Startup

The Scenario: A firm is developing a new hydrogen fuel cell with 20% higher energy density. The project is certified as an “Excelsior Green Project.”

Supporting Roles:

• Test Driver: Operates the hydrogen-powered prototype in a variety of extreme weather conditions to collect performance data. While not a scientist, the driver’s labor is DSR as it is the “Direct Conduct” of a test protocol.
• IT Support Staff: Manages the off-site server cluster that runs the fluid dynamics simulations for the fuel cell’s internal structure. This is DSR.
• Safety Officer: Specifically assigned to the hydrogen lab to monitor volatile gas levels during experimental runs. This is DSR because the research cannot proceed without this specialized safety oversight.

The Result: These wages qualify for the enhanced 8% Excelsior R&D credit rate because they are tied to a project aimed at “creating clean energy solutions.”

Case Study 3: The New York City Software Firm

The Scenario: A FinTech firm is building a new AI-driven fraud detection engine that uses neural networks to identify patterns in real-time.

Supporting Roles:

• QA Tester: Involved in the early-stage development to find flaws in the neural network’s logic. This is DSR.
• DevOps Engineer: Sets up the “sandbox” environments where different versions of the AI are pitted against one another. This is DSR.
• Clerk: Manages the tagging of “clean” versus “fraudulent” data used to train the experimental model. This data preparation is a necessary support function for the research.

The Result: The firm can claim these wages, but they must be careful to exclude any time spent on routine server maintenance or customer support for their existing products.

Case Study 4: The Long Island Bio-Pharmaceutical Lab

The Scenario: A “new” life sciences business is developing a novel mRNA therapy for a rare genetic disorder.

Supporting Roles:

• Lab Worker: Spends the day cleaning and sterilizing glassware and bioreactors used in mRNA switch experiments. This is the textbook example of DSR.
• Clinical Data Entry Clerk: Enters the results of laboratory assays into a database for the lead biologist to review. This is DSR.
• Shipping Coordinator: Manages the “cold chain” logistics for transporting experimental samples between two research sites in New York. This is DSR because the integrity of the experiment depends on the support role’s specialized handling.

The Result: The company can claim a 20% refundable credit (if under 10 employees) on these wages under the Life Sciences R&D program.

The Impact of Section 174 Amortization and the “One Big Beautiful Bill”

A major shift in the tax environment occurred with the Tax Cuts and Jobs Act (TCJA), which mandated that Section 174 R&E expenditures be capitalized and amortized over five years for domestic research. Because New York’s R&D credits are tied to federal definitions, this amortization requirement directly impacts how DSR is treated on a New York tax return.

Capitalization of Support Labor

IRS Notice 2023-63 clarifies that all costs “directly supporting” R&E activities must be capitalized. This includes the labor costs of support personnel. For a New York business, this means that while they might get a 6% to 20% tax credit for their DSR wages, they can no longer deduct those wages immediately as a business expense. Instead, they must spread the deduction over five years.

The 2024 Legislative Relief (OB3)

The “One Big Beautiful Bill Act” (OB3), signed in July 2024, restores the immediate deduction for domestic research expenditures for tax years beginning after December 31, 2024. For the majority of New York startups and small businesses (those with under $31 million in gross receipts), this change can be applied retroactively to 2022.

This restoration is a massive boon for New York firms with high support-labor costs. It allows them to once again combine the immediate expensing of DSR wages with the state’s refundable tax credits. For a pre-revenue company, this maximizes the “burn rate” efficiency and increases the total cash benefit from the state’s R&D programs.

Comparison with Other States: New York’s Competitive Position

New York’s R&D credit structure is more complex than many other states, but it is also more generous in its “refundability.” Many states offer non-refundable credits that can only be carried forward to offset future taxes. New York’s focus on cash refunds via the Excelsior and Life Sciences programs makes it a premier destination for startups that are not yet profitable.

State	R&D Credit Rate	Refundability	Support Labor Eligibility
New York	6% – 20%	Fully Refundable	Follows IRC § 41 (includes DSR)
California	15%	Non-refundable (Carryforward)	Follows IRC § 41 (includes DSR)
Missouri	15% – 20%	Non-refundable	Follows IRC § 41 (includes DSR)
Iowa	6.5%	Fully Refundable	Follows IRC § 41 (includes DSR)

New York’s “Life Sciences” rate of 20% for small firms is one of the highest in the nation. By including Directly Supporting Research in this high-rate calculation, New York provides a powerful incentive for biotech firms to build their support infrastructure within the state rather than outsourcing it to lower-cost jurisdictions.

Final Thoughts: Strategic Implications for New York Businesses

Directly Supporting Research is the “unsung hero” of the New York R&D tax credit. While the lead scientists and engineers receive the bulk of the attention, the support staff—the machinists, lab technicians, data clerks, and IT specialists—provide the essential foundation upon which innovation is built. For a business operating in New York, the strategic identification and documentation of these roles are not just a matter of tax compliance; they are a matter of competitive survival.

The New York State revenue office guidance, largely following the federal IRC Section 41, provides a clear but rigorous pathway for including these support costs. The “direct” versus “indirect” distinction is the primary hurdle, requiring companies to move beyond general job descriptions and into detailed, project-specific task tracking. As the state continues to pivot toward “Green CHIPS,” semiconductors, and life sciences, the definition of DSR will likely expand to include even more specialized technical support roles.

For business owners, CFOs, and tax professionals, the mandate is clear: contemporaneous documentation is the only defense against the “adversarial interactions” of a field audit. By treating DSR as a core component of the R&D narrative—and by leveraging the recent legislative relief of the OB3 Act—New York firms can maximize their cash refunds, sustain their employment thresholds, and continue to lead the nation in technological advancement.