Qualified Research Expenses (QREs)

Qualified Research Expenses (QREs) in New York are the state-sourced innovation costs—primarily in-state wages, supplies, and cloud computing—that qualify for federal R&D tax credits under Internal Revenue Code Section 41. When specifically applied within New York’s tax framework, these expenses serve as the primary basis for calculating valuable, refundable state-level incentives like the Excelsior Jobs and Life Sciences tax credits.

The concept of the Qualified Research Expense (QRE) is the cornerstone of the modern industrial policy of New York State, serving as the quantitative bridge between private-sector innovation and public-sector subsidization. While the federal government provides a broad incentive through Internal Revenue Code (IRC) Section 41, New York has refined this mechanism to ensure that the fiscal benefits provided to corporations translate directly into localized economic activity. This is achieved by adopting the rigorous federal definitions of what constitutes “qualified research” while imposing a strict geographic “nexus” requirement on the “expenses” themselves. For a business operating in New York, a QRE is not merely a technical accounting category; it is a strategic asset that, when properly documented and certified by state agencies such as Empire State Development (ESD), can generate significant, refundable cash flow.

The administrative complexity of these credits necessitates a multi-layered understanding of both federal law and local revenue office guidance. The New York Department of Taxation and Finance (DTF) and the ESD act in tandem, with the former managing the tax filing and audit processes and the latter overseeing the competitive certification and performance-monitoring phases. This report explores the definitions of QREs, the statutory frameworks of the Excelsior Jobs Program and the Life Sciences R&D Tax Credit, and the extensive body of administrative guidance—including Technical Memoranda (TSB-M) and Tax Bulletins—that dictates how these laws are applied in practice.

The Federal Foundation: The Statutory Meaning of Qualified Research

To understand New York QREs, one must first master the federal definition provided in IRC Section 41(b), as New York law largely incorporates these standards by reference. A research expense only becomes a “New York QRE” if it first meets the rigorous “Four-Part Test” established by the IRS to define a Qualified Research Activity (QRA).

The Four-Part Test for Qualified Research

The federal government and New York State utilize a specific four-part test to determine if an activity is eligible for R&D tax incentives. Every project for which QREs are claimed must satisfy each of the following criteria:

• Permitted Purpose (The Business Component Test): The research must be intended to develop a new or improved “business component,” defined as a product, process, software, technique, formula, or invention. The objective must be to improve the functionality, quality, reliability, or performance of that component.
• Technological in Nature: The research must fundamentally rely on the principles of the “hard” sciences, such as physical or biological science, engineering, or computer science. Research in the social sciences, arts, or humanities is explicitly excluded.
• Elimination of Uncertainty: At the outset of the project, there must be a technological uncertainty regarding the capability or method of developing the component, or its appropriate final design. If the solution is readily apparent to a professional in the field using publicly available information, it does not qualify.
• Process of Experimentation: The taxpayer must engage in a systematic process to evaluate one or more alternatives to achieve the desired result. This process typically involves modeling, simulation, systematic trial and error, or other scientific methods of testing hypotheses.

The Core Components of Qualified Research Expenses

Once an activity is deemed a QRA, the costs associated with that activity are categorized as QREs. Under federal and New York law, these expenses fall into four primary buckets:

• Wages: This includes the portion of an employee’s W-2 wages attributable to performing, supervising, or directly supporting qualified research.
• Supplies: These are tangible, non-depreciable properties used in the research process, such as chemicals, prototypes, and testing materials.
• Contract Research: These are payments to third parties for performing research on the taxpayer’s behalf. Typically, 65% of these costs are eligible at the federal level, provided the taxpayer maintains rights to the IP and bears the economic risk.
• Cloud Computing/Computer Rental: Costs paid for the right to use computers to conduct research, which in the modern era primarily refers to cloud hosting services like AWS or Azure for software development.

The New York Geographic Nexus and Local Application

The defining characteristic of a New York QRE is its location. New York law restricts the credit to the “portion” of the federal research credit that relates to expenditures “attributable to activities conducted in New York State”. This creates a geographic “silo” for R&D costs.

Calculating the New York Portion

For a multinational or multi-state corporation, determining NYS QREs requires a precise allocation. Wages are generally allocated based on where the employee’s services are performed; if an engineer is based in a Manhattan lab, their qualified wages are NYS QREs. If they work in a New Jersey lab, those wages are excluded. Supplies must be “used or consumed” within New York to qualify.

Expense Category	New York Qualification Requirement
Wages	Employee must perform services within NYS; typically verified via payroll records and W-2s.
Supplies	Tangible property must be used or consumed in an NYS facility.
Cloud Computing	Hosting or rental must be for R&D activities conducted by personnel or systems in NYS.
Contract Research	Work must be performed by the contractor within the geographic boundaries of NYS (Note: excluded for Life Sciences credit).

The Refundability Advantage

One of the most significant aspects of New York’s R&D tax law—across both the Excelsior and Life Sciences programs—is that the credits are “fully refundable”. In many other jurisdictions, R&D credits can only be used to offset current tax liability, with excess amounts carried forward to future years. In New York, if the credit amount exceeds the taxpayer’s liability for the year (after reaching the statutory minimum tax), the state will issue a check for the difference. This provides a vital source of non-dilutive capital for pre-revenue startups and expanding enterprises.

The Excelsior Research and Development Tax Credit Component

The Excelsior Jobs Program, governed by Economic Development Law Section 355 and Tax Law Section 31, is the primary vehicle for R&D incentives for established and growing strategic industries in New York.

Program Eligibility and Strategic Industries

The Excelsior program is not an entitlement; it is a discretionary program that requires businesses to apply and be admitted by ESD. To qualify, a firm must operate predominantly in one of several strategic industries and meet rigorous job creation or investment thresholds.

Strategic Industry	Job Growth Track Threshold (Net New Jobs)	Investment Track Threshold (Retained Jobs + Investment)
Scientific R&D	5	25 Employees + Significant Investment
Software Development	5	25 Employees + Significant Investment
Agriculture	5	25 Employees + Significant Investment
Manufacturing	5	10 Employees + Significant Investment
Financial Services	25	25 Employees + Significant Investment
Entertainment/Music	5-100	N/A

The Excelsior Calculation Formula

The Excelsior R&D credit component is calculated as 50% of the portion of the federal R&D tax credit that relates to New York expenditures. However, this amount is subject to a statutory cap based on a percentage of the total NYS research expenditures.

Credit Amount = min(0.50 × Federal Credit Portion NYS, Statutory Cap × NYS QREs)

The statutory cap varies depending on the nature of the project, with higher caps provided for industries that align with New York’s long-term sustainability and technological goals.

Project Type	Research Expenditure Cap
Standard Strategic Project	6% of NYS QREs
Semiconductor Supply Chain Project	7% of NYS QREs
Green Project / Green CHIPS	8% of NYS QREs

A “Green Project” is defined by ESD as one that develops products or technologies primarily aimed at reducing greenhouse gas emissions or supporting clean energy, such as renewable energy systems or non-hydrocarbon fuel vehicles.

The Life Sciences Research and Development Tax Credit Program

For early-stage biotechnology and pharmaceutical companies, New York offers the Life Sciences R&D Tax Credit, a program that is often more accessible to startups than the broader Excelsior program.

Unique Exclusions: The Contract Research Rule

A critical distinction in the Life Sciences program is its treatment of QREs. While federal and Excelsior credits follow the IRC definition that includes contract research, the Life Sciences credit explicitly excludes contract research expenses. For this program, QREs are limited to:

1. In-house Wages: For qualified services performed in NYS.
2. Supplies: Used in qualified research in NYS.
3. Computer Rental/Hosting: For the conduct of qualified research in NYS.

This exclusion is a deliberate policy choice to encourage life sciences firms to build out their own internal research infrastructure and scientific teams within New York State rather than outsourcing research to external labs.

Credit Rates and Caps for Life Sciences

The Life Sciences credit is tiered based on the company’s size, providing an enhanced benefit to the smallest startups.

Company Size	Credit Rate (of NYS QREs)
Fewer than 10 Employees	20%
10 or More Employees	15%

The credit is limited to $500,000 per year per taxpayer and can be claimed for a maximum of three consecutive years. There is a statewide annual cap of $10 million for the entire program, and credits are allocated on a first-come, first-served basis.

The “New Business” Requirement

To qualify, a life sciences company must be a “new business.” Under Tax Law Section 210-B(1)(f), this means the company cannot be a subsidiary of a corporation that already pays taxes in New York, and it must not be substantially similar in ownership and operation to a previous NYS taxpayer. This ensures the program supports new innovation rather than existing corporate expansions.

Revenue Office Guidance: TSB-Ms and Administrative Bulletins

The New York State Department of Taxation and Finance (DTF) provides technical interpretation of the law through Technical Memoranda (TSB-M) and Tax Bulletins. These documents are essential for understanding how the state’s tax auditors will evaluate a QRE claim.

Key Technical Memoranda (TSB-M)

Historically, TSB-Ms have been used to clarify major shifts in the tax law. For example, TSB-M-11(6)I, issued in June 2011, detailed the expansion of the Excelsior Jobs Program benefit period from five to ten years and established the modern calculation for the R&D component. It also clarified that a participant can claim both the Excelsior Investment Tax Credit (ITC) and the ITC for R&D property, a rare exception to the general rule against “double-dipping”.

Another critical document is TSB-M-12(9)C, which clarified the qualifications for the Qualified Emerging Technology Company (QETC) tax credits. While the QETC credit is distinct from the Excelsior R&D credit, they both rely on a similar “ratio of R&D funds to net sales” (6%) and use similar definitions for R&D property.

Sales and Use Tax Guidance (TB-ST-770)

The state also provides an “above-the-line” incentive through sales tax exemptions for R&D equipment. According to Tax Bulletin TB-ST-770, purchases of tangible personal property can be made without paying sales tax if they are used “directly and predominantly” (more than 50% of the time) in research and development in the “experimental or laboratory sense”.

“Experimental or laboratory sense” includes:

• Basic research in a technical field.
• Advancing technology in a field of endeavor.
• Developing new or improved products.
• Developing new uses for existing products.

The bulletin also clarifies that utilities (gas, electricity, steam) are 100% exempt from sales tax if used “directly and exclusively” in R&D. This requires taxpayers to maintain detailed engineering surveys or sub-metering data to prove exclusive use in a laboratory environment.

Practical Example: A Life Sciences Startup Calculation

To illustrate the application of these rules, consider “Quantum Genomics,” a new life sciences company based in Buffalo, NY, with 6 employees. In 2024, Quantum Genomics spent $1,000,000 on research activities.

Step 1: Categorize the Expenses

The company’s total R&D spend includes:

• Wages for Scientists in Buffalo: $600,000
• Wages for a Consultant in Toronto: $100,000
• Lab Supplies (Chemicals/Reagents): $200,000
• Contract Research (Outsourced to a CRO in Ohio): $100,000

Step 2: Identify New York QREs

For the NYS Life Sciences R&D Credit, we must apply the geographic and categorical filters:

• Wages: Only the $600,000 for Buffalo-based scientists qualifies. The Toronto consultant is excluded.
• Supplies: The $200,000 in supplies qualifies, assuming they were used in the Buffalo lab.
• Contract Research: The $100,000 is excluded entirely under Life Sciences program rules.

Total NYS QREs = $800,000

Step 3: Calculate the Credit

Since Quantum Genomics has fewer than 10 employees, they qualify for the 20% rate:

Credit = $800,000 × 0.20 = $160,000

This $160,000 is fully refundable, meaning Quantum Genomics will receive a check from New York State for this amount, even if they have zero income tax liability for the year.

Documentation, Forms, and Compliance Requirements

Substantiating QREs is a high-stakes administrative task. The New York Department of Taxation and Finance requires taxpayers to use specific forms and maintain rigorous records to defend against audits.

Mandatory Filing Forms

Taxpayers must use the following forms depending on their program and entity type:

• Form CT-607: Claim for Excelsior Jobs Program Tax Credit (for C-Corporations).
• Form IT-611: Claim for Excelsior Jobs Program Tax Credit (for Partnerships, S-Corp shareholders, and individuals).
• Form CT-648: Life Sciences Research and Development Tax Credit (for C-Corporations).
• Form IT-648: Life Sciences Research and Development Tax Credit (for all others).
• Form ST-121: Exempt Use Certificate (for claiming sales tax exemptions at the point of purchase).

Audit Readiness and Contemporaneous Records

Documentation for R&D credits must be “contemporaneous,” meaning it must be generated at the time the research is conducted. The IRS and NYS DTF commonly request:

• Payroll Records: To verify wages, including W-2s and time-tracking data that link specific hours to specific research projects.
• The “Substantially All” Rule Evidence: If an employee is claimed at 100% of their wages, the employer must prove they spent at least 80% of their time on QRA.
• Experimental Documentation: Lab notebooks, project plans, design iterations, and testing logs that prove a “process of experimentation” occurred.
• The ESD Certificate: A claim is invalid without a copy of the annual Certificate of Tax Credit issued by Empire State Development.

Statistical Impact of New York R&D Programs

New York’s R&D tax policy has had a measurable impact on the state’s high-tech economy. According to the ESD Quarterly Report Summary for June 2024, the Excelsior Jobs Program has been highly successful in leveraging private investment.

Excelsior Jobs Program Metric (June 2024)	Impact Value
Total Projects Admitted	796
Committed Tax Credits	Over $1.60 Billion
Committed R&D Expenditures (NYS)	$2.96 Billion
Projected New Jobs	88,476
Capital Investment Committed	$8.71 Billion

The Life Sciences Initiative has seen similar success, with a $320 million budget for strategic programs and $200 million dedicated specifically for tax credits. Between 2017 and 2022, life science jobs in New York grew by 18.5%, a rate 13.3% higher than the national private sector growth. Furthermore, the state issued $3.66 million in R&D tax credits against $34.68 million in qualified expenses in the 2022-2023 period alone.

The Convergence of Federal and State Tax Reform: 2025 and 2026

The landscape of QREs is currently being reshaped by the federal One Big Beautiful Bill Act (OBBBA) of 2025 and subsequent New York legislative responses.

Restoring Immediate Expensing (Section 174)

A major challenge for R&D companies between 2022 and 2024 was the federal requirement under the Tax Cuts and Jobs Act (TCJA) to capitalize and amortize R&D expenses over five years rather than deducting them immediately. The OBBBA of 2025 has permanently reinstated immediate expensing for domestic research costs. For New York companies, this reduces the “tax drag” on R&D activity and simplifies the calculation of federal taxable income, which serves as the starting point for state corporate franchise tax.

Strategic Enhancements for “Green CHIPS”

In 2024 and 2025, New York expanded the Excelsior program to include specific “Green CHIPS” projects. These are massive semiconductor manufacturing projects that meet sustainability requirements. Such projects are eligible for an 8% cap on R&D expenditures, the highest in the state’s history. This signals New York’s intent to be a global hub for “green” semiconductor fabrication.

Final Thoughts: The Strategic Importance of QRE Optimization

New York’s R&D tax credit framework represents one of the most sophisticated industrial incentive structures in the United States. By utilizing the federal IRC Section 41 definition of QREs as a foundation, while layering on geographic requirements and industry-specific enhancements, New York has created a surgical tool for economic growth.

For the modern business, QREs are more than a tax deduction; they are a mechanism for non-dilutive financing. The shift toward refundability—where the state pays the taxpayer even in loss-making years—is a critical lifeline for the biotechnology, software, and semiconductor sectors. However, the reward of these credits comes with the burden of precise compliance. The requirement for ESD certification, the strict exclusion of out-of-state activities, and the need for contemporaneous documentation make R&D credit management a cross-functional responsibility involving finance, legal, and R&D leadership.

As New York continues to focus on “Green” technologies and “Semiconductor” supply chains through 2026, the value of correctly identifying and documenting QREs will only increase. Organizations that master the nuances of TSB-Ms, sales tax exemptions, and the specific program caps will be best positioned to innovate, scale, and capture the substantial fiscal benefits provided by the Empire State.