Directly supporting research involves the performance of non-research tasks that are nevertheless essential to the successful execution of a qualified research activity, such as maintaining experimental equipment or documenting laboratory results. This category of qualified services enables taxpayers to capture a broader range of employee wages within their research and development tax credit calculations under Oregon law.

The framework of the Oregon Research and Development (R&D) tax credit is deeply integrated with the federal Internal Revenue Code (IRC), particularly Section 41, which serves as the foundational anchor for defining eligible activities and expenditures. Oregon’s legislative history demonstrates a consistent pattern of conforming to federal definitions for “qualified research” and “qualified research expenses” (QREs), while establishing unique state-level parameters for credit rates, expenditure caps, and industry-specific focuses. For taxpayers operating in Oregon, understanding the nuance of “directly supporting research” is critical because it allows for the inclusion of wages paid to employees who might otherwise be viewed as outside the core R&D team. This inclusion can significantly increase the total QREs reported, thereby maximizing the tax benefit under statutes such as ORS 317.152 and the newly enacted semiconductor-specific credit under ORS 315.518. The following analysis explores the statutory basis, administrative guidance, and practical application of this definition within the Oregon tax landscape.

The Statutory Foundation of Oregon R&D Incentives

The Oregon Revised Statutes provide the primary legal basis for claiming R&D incentives, structured largely around the corporate excise tax and, more recently, specialized provisions for high-tech industries. Historically, the state has offered the Qualified Research Activities Credit under ORS 317.152 and the Alternative Qualified Research Activities Credit under ORS 317.154. Although the general corporate R&D credit saw a period of expiration for many taxpayers after 2017, the 2023 Oregon Legislature revitalized the R&D landscape by introducing specialized credits for the semiconductor industry and amending existing statutes to extend applicability into the late 2020s.

Federal Conformity and IRC Section 41

Oregon law explicitly states that the determination of the credit shall be made in accordance with Section 41 of the Internal Revenue Code. This conformity is the most vital aspect of the state’s tax policy regarding innovation. Specifically, ORS 317.152(3) mandates that the Income Tax Regulations prescribed by the Secretary of the Treasury under the authority of IRC Section 41 apply for state purposes, except where modified by Oregon law or Department of Revenue rules. Under IRC Section 41(b)(2)(B), “qualified services” are defined as services consisting of engaging in qualified research or engaging in the direct supervision or direct support of research activities which constitute qualified research.

The inclusion of “direct support” in the federal definition—and by extension, the Oregon definition—means that the wages of support personnel are eligible for the credit provided their work is directly linked to a specific research project that meets the four-part test for qualified research. The legal significance of this conformity cannot be overstated; it ensures that Oregon taxpayers can rely on federal treasury regulations and federal tax court precedents when interpreting the limits of “direct support” on their state returns.

Evolution of the Oregon Research Credit

The trajectory of Oregon’s research incentives has shifted from a broad-based corporate credit to a more targeted industrial policy. The initial credits established in 1989 were intended to foster a general climate of innovation across all sectors. However, as the state’s economy became increasingly reliant on the “Silicon Forest” electronics hub, the legislature recognized the need for higher credit rates and more flexible refundability to maintain global competitiveness.

The reintroduction of the semiconductor credit in 2023 via House Bill 2009 marked a significant escalation in the state’s commitment to R&D. This new credit specifically targets increases in qualified research expenses directly related to semiconductor design, fabrication, and testing, providing a 15% rate that is among the highest in the nation.

Defining Directly Supporting Research Activities

The Oregon Department of Revenue and the Oregon Business Development Department (Business Oregon) rely on Treasury Regulation § 1.41-2(c) to differentiate between direct support and indirect overhead. Direct support is characterized by its immediate proximity to the actual conduct of the research. While the lead researcher might formulate the hypothesis and design the experiment, the support staff performs the mechanical, clerical, or technical tasks that allow the experiment to proceed.

Essential Categories of Support

Guidance and case law incorporated into Oregon’s tax environment identify several specific activities that constitute direct support. These tasks are typically performed by individuals who are not themselves scientists or engineers but whose labor is a necessary component of the technical process.

The first major category is prototype construction and experimental modeling. This includes personnel such as machinists, fabricators, or technicians who spend their time building physical models used in testing. If a machinist is creating a specific part that will be subjected to stress tests to determine the failure point of a new alloy, the time spent machining that part is a direct support activity. Conversely, if the same machinist is producing parts for a commercial production run, that time is excluded.

The second category involves data processing and technical reporting. Modern research generates vast amounts of raw data that must be cleaned, formatted, and input into analysis software. Employees who type up laboratory results, maintain the integrity of R&D-specific databases, or document the outcomes of a trial for the research team are providing direct support. This documentation is often a legal requirement for the credit, making the support role even more vital to the overall claim.

The third category covers specialized equipment maintenance and lab preparation. This includes technicians who calibrate, clean, or repair equipment solely used for R&D activities. In the semiconductor industry, this might involve the maintenance of cleanroom environments where even minute particles can invalidate an experiment. Staff dedicated to ensuring these environments meet the technical requirements of a specific research project are providing direct support to the research conducted therein.

Distinguishing Direct Support from Indirect Overhead

A frequent point of contention in Oregon Department of Revenue audits is the distinction between direct support and “general and administrative” (G&A) services. Oregon rules, following federal precedents, explicitly exclude services that only indirectly benefit research.

The core distinction lies in the concept of “immediate” benefit. Services such as payroll or HR benefit the company as a whole and only indirectly support the research by ensuring the researchers are paid and hired. Direct support, by contrast, is task-oriented and project-specific. If the service is not being performed on or for the specific business component under development, it likely falls into the category of non-qualified overhead.

Administrative Guidance and the Regulatory Framework

The Oregon Department of Revenue (DOR) provides detailed guidance through the Oregon Administrative Rules (OAR). For R&D credits, these rules act as the primary interface between the high-level statutes and the practicalities of filing a tax return.

OAR 150-317-0280: Standard Qualified Research Credit

This rule provides the baseline for the credit allowed under ORS 317.152. It clarifies that the credit must be calculated in a manner consistent with IRC Section 41, emphasizing that the state adopts the federal definitions of QREs. The rule specifically notes that the applicable percentage for Oregon purposes is 5%, regardless of the method used to calculate the federal credit. This rule is critical for corporations that do not fit the narrow “semiconductor” definition but still perform significant R&D in the state. It ensures that the definition of “direct support” remains consistent across all types of research activities in Oregon.

OAR 150-315-0195: Semiconductor Company Research and Development

With the passage of House Bill 2009 in 2023, Oregon introduced a more robust 15% credit for semiconductor companies. OAR 150-315-0195 provides the administrative backbone for this credit. It explicitly adopts the federal Alternative Simplified Credit (ASC) method under IRC Section 41(c)(4) as an election for Oregon taxpayers.

This guidance is more stringent regarding industry-specific alignment. Because the credit is partially refundable and carries a higher percentage, the state requires a certification process through Business Oregon. Taxpayers must provide a description of how their R&D activities “support the taxpayer in conducting a business or trade directly related to semiconductors”. This language mirrors the “direct support” requirement and emphasizes that even auxiliary activities must be industry-specific to qualify for the 15% rate.

Business Oregon Certification and Division 401 Rules

The Oregon Business Development Department (Business Oregon) manages the certification process for the semiconductor credit under Division 401 of the OAR. These rules specify that a taxpayer must file a written application for certification no later than October 15 of each calendar year.

The application requires an attestation that the proposed research and development activities will support the taxpayer in conducting a trade or business directly related to semiconductors. This includes a report of the taxpayer’s qualified research expenses and basic research payments from the three preceding tax years to establish a baseline. The department then reviews these applications to ensure the activities meet the technological and industry-specific requirements before issuing a certification that allows the taxpayer to claim the credit on their DOR return.

The Four-Part Test in the Oregon Context

To qualify for the credit in Oregon, the underlying research activity must satisfy the federal four-part test. The meaning of “directly supporting research” is only relevant if the support is given to an activity that passes these four benchmarks. If the primary activity is non-qualified, then any support for that activity is also non-qualified.

Permitted Purpose and Business Components

The research must be intended to develop a new or improved “business component,” defined as a product, process, software, formula, or invention that is held for sale, lease, or use in the taxpayer’s trade or business. Direct support personnel contribute to this purpose by assisting in the physical realization of the component. For example, in the pharmaceutical industry, a researcher may be developing a new drug compound (the business component). A support person who prepares the cell culture media used in the drug assays is facilitating the development of that business component.

Elimination of Technical Uncertainty

The activity must aim to discover information that eliminates technical uncertainty regarding the capability, method, or design of the business component. Uncertainty exists if the information available to the taxpayer does not establish whether the component can be developed, how it can be developed, or what the appropriate design should be. Direct support roles often involve the technical data entry or specimen preparation required to run the very tests that eliminate this uncertainty. Without the support staff to manage the environment or the data, the process of eliminating uncertainty would be impossible to document or replicate.

Process of Experimentation

The taxpayer must engage in a systematic process of evaluating alternatives, which may include trial and error, modeling, or simulation. This process is the heart of the R&D credit. Direct support in this context includes the labor of individuals who run these simulations or who perform the manual trials dictated by the researchers. In software development, this might include quality assurance (QA) testers who systematically test different versions of a new algorithm to find the most efficient iteration.

Technological in Nature

The research must fundamentally rely on principles of the “hard sciences,” such as physics, biology, chemistry, engineering, or computer science. Directly supporting research must also be grounded in these principles. A person typing a report on the results of a marketing survey is not providing qualified support because the survey itself is not technological in nature. However, a person typing a report on the results of a metallurgical stress test is providing qualified support because the underlying activity is based on the physical sciences.

Operationalizing Wage Inclusion and the 80% Rule

Wages typically comprise the largest portion of any R&D credit claim in Oregon. Therefore, the proper classification of “directly supporting” personnel is often the difference between a modest credit and a significant one. Oregon law, by adopting the federal “substantially all” rule, provides a powerful mechanism for maximizing these claims.

The “Substantially All” (80%) Threshold

IRC Section 41(b)(2)(B) stipulates that if “substantially all” of the services performed by an individual for the taxpayer during the taxable year consist of services meeting the requirements for qualified research, direct supervision, or direct support, then 100% of the wages paid to that individual are treated as qualified research expenses. In Oregon tax administration, “substantially all” is defined as 80% or more.

This creates a significant strategic advantage for firms that dedicate support staff to R&D. If a lab technician spends 85% of their time on qualified direct support (cleaning labs, inputting data) and 15% on general administrative tasks (checking company email, attending HR meetings), the taxpayer can claim the full 100% of their salary as an Oregon R&D expense. However, if the technician only spends 70% of their time on direct support, the taxpayer must meticulously allocate only that 70% of the salary to the credit.

Inclusion of Direct Supervision

Closely related to direct support is “direct supervision.” This refers to the “immediate” supervision of qualified research activities. In the landmark case Suder v. Commissioner, the US Tax Court (whose rulings inform Oregon law) rejected the idea that high-level executives are categorically excluded from the credit. If an executive, such as a Vice President of Engineering, has a technical background and spends time providing specific design direction or reviewing technical trial results with the R&D team, their wages can qualify as direct supervision.

However, “direct supervision” does not include higher-level management who only review the financial or administrative progress of the R&D department. The supervision must be technical in nature. For example, an R&D manager who reviews the data from a failed experiment and suggests a new chemical ratio for the next trial is providing direct supervision. A manager who simply reviews the department’s budget and approves new hires is not.

Industry-Specific Applications of Direct Support

While the legal definition of “directly supporting research” remains constant, its practical application varies significantly across Oregon’s key industries. The nature of the “technical uncertainty” in each field dictates the types of support activities that are considered essential.

Semiconductor and Electronics

In the semiconductor industry, research often involves cleanroom environments and highly specialized lithography or etching processes. Direct support in this context includes individuals who maintain these hypersensitive environments. For instance, technicians who monitor and maintain the air filtration and particulate levels in a cleanroom specifically to allow for a series of experimental wafer runs are providing direct support.

Furthermore, in the design phase, IT support for high-performance computing (HPC) clusters used for electronic design automation (EDA) simulations can qualify. If the IT staff’s tasks are dedicated to ensuring the research team has the computational capacity to run iterative simulations, their work is directly supporting the experimentation process.

Manufacturing and Aerospace

Oregon’s manufacturing sector often focuses on precision machining and advanced materials. Here, direct support frequently takes the form of custom tooling and pilot batch supervision. A machinist who develops unique carbide inserts or novel geometries for experimental milling to achieve a specific performance metric is providing direct support.

Quality technicians who run trial batches on the production floor to test a new automated assembly technique also qualify. Their role is to document failure rates and identify wear patterns during the “trial and error” phase of the experimentation, which is a core support function.

Biotechnology and Pharmaceuticals

For life science firms, direct support typically revolves around the laboratory environment and clinical trials. Personnel who manage cell cultures, reagents, or animal immunogenicity models specifically for an ongoing experiment are eligible.

In the context of clinical trials, the documentation requirements are immense. Staff who enter patient data from trials or who maintain the stability assays to ensure the experimental monoclonal antibodies have not aggregated are providing essential direct support to the research process. While general regulatory affairs work is often excluded, the specific technical documentation required to prove the outcomes of experimentation can qualify if it is an integral part of the process of experimentation.

Calculation Methodologies and Oregon Sales Factors

The Oregon R&D credits are calculated based on the increase in QREs over a base amount, or in some cases, as a percentage of expenses exceeding a sales-based threshold. Understanding the interplay between “direct support” wages and these calculation methods is essential for accurate tax planning.

The Regular Credit vs. the Alternative Simplified Credit (ASC)

Oregon taxpayers can generally choose between two primary methods for calculating the credit, both of which allow for the inclusion of direct support wages.

The Regular Method, as outlined in ORS 317.152, calculates the credit based on the excess of current-year QREs over a “base amount.” The base amount is typically derived from a “fixed-base percentage” of the taxpayer’s average gross receipts for the prior four years.

The Alternative Simplified Credit (ASC) Method, which Oregon allows under OAR 150-315-0195, is often preferred by taxpayers because it does not require historical data from the 1980s. Instead, it uses the average QREs from the prior three tax years to determine the base.

Credit_ASC = 0.14 × (QRE_current – 0.50 × QRE_avg3year)

In this formula, the inclusion of direct support wages in the current year (QRE_current) will increase the credit. However, taxpayers must ensure that they have consistently included (or retrospectively adjusted) support wages in the prior three-year average to ensure a “like-to-like” comparison, which is a major focus of Oregon tax audits.

The Impact of Oregon Sales

For the Alternative Qualified Research Activities Credit under ORS 317.154, the credit is based on expenses that exceed 10% of “Oregon sales”. Oregon sales are computed using the laws for calculating the numerator of the Oregon sales factor under ORS 314.665.

This focus on Oregon-specific sales and Oregon-specific research ensures that the tax benefit is tied directly to the state’s economy. Direct support wages must be paid to employees performing work within the state of Oregon to qualify for the state-level credit, even if the primary research team is located elsewhere.

Refundability and the Economic Tiering of Credits

A unique and highly attractive feature of the modern Oregon R&D landscape, particularly for the semiconductor industry, is the introduction of partial refundability. This is designed to assist smaller firms that may have significant R&D expenditures (and high support costs) but little to no tax liability.

The amount of the credit that can be refunded depends on the number of employees the taxpayer has in Oregon. This creates a tiered system that heavily favors smaller startups and mid-sized firms.

The inclusion of support wages can be the determining factor in whether a small firm reaches the QRE threshold required to generate a meaningful refund. For a startup with 50 employees, a $100,000 credit (calculated including support staff wages) can result in a $75,000 cash payment from the Oregon Department of Revenue, which can then be reinvested in further innovation.

Audit Risks and Substantiation Requirements

Because “direct support” is a qualitative category, it is a primary target for Department of Revenue auditors. The burden of proof lies entirely with the taxpayer to demonstrate that the services were direct rather than indirect overhead.

Contemporaneous Documentation

The Oregon Department of Revenue looks for contemporaneous documentation—records created at the time the work was performed. Reconstructing “direct support” hours years later based on memory or general job descriptions is often rejected in audit.

Effective substantiation includes project-specific timesheets where support staff code their hours to individual R&D projects. If a technician cleans the lab, they should note which research project was active in the lab at that time. Other evidence includes lab notebooks, prototype logs, and technical reports that mention the contribution of support staff.

The Implications of Recent Case Law

Recent federal cases like Little Sandy Coal Company v. Commissioner have set a higher bar for documenting the “substantially all” requirement for the process of experimentation itself. The court ruled that if a project is not “substantially all” (80%) qualified research, then the entire project may be disqualified. This has a ripple effect on support staff; if the engineers’ work on a project is deemed non-qualified because 30% of their time was spent on routine production fixes, then the wages of the support staff who assisted them are also entirely disqualified.

Furthermore, the IRS and the Oregon DOR are increasingly interested in “business component” level detail. New reporting requirements (such as the revised Form 6765 and Oregon’s Schedule OR-RESEARCH) will require taxpayers to break down wages by component. Taxpayers must be able to say, “Technician X spent 40 hours supporting the development of Chip A and 20 hours supporting the development of Chip B”.

Comprehensive Case Study: Pacific Micro-Systems LLC

To illustrate the application of “directly supporting research” within the Oregon R&D tax credit framework, consider Pacific Micro-Systems LLC (PMS), a semiconductor design firm based in Hillsboro, Oregon. In the 2024 tax year, PMS has 120 employees and is engaged in developing a novel sensor for automotive safety applications.

Organizational Structure and Role Analysis

The project team for the “Safeguard Sensor” project includes the following individuals:

1. Lead Design Engineer: Spends 100% of her time designing the circuit architecture and running simulations. (Direct Performer).
2. Software Developer: Spends 90% of his time coding the sensor’s firmware and 10% on general website maintenance. (Direct Performer).
3. Lab Technician: Spends 85% of her time preparing chemical substrates for experimental sensor runs and 15% on general stockroom inventory for the whole office. (Direct Support).
4. Junior Draftsman: Spends 50% of his time creating technical drawings of prototype iterations for the engineers and 50% on sales brochures for existing products. (Direct Support/G&A Mixed).
5. Engineering Manager: Spends 40% of her time providing technical oversight and design review for the project and 60% on HR and administrative tasks. (Direct Supervision/G&A Mixed).

Wage Qualification under Oregon Law

Under the 80% rule, the Lead Engineer, Software Developer, and Lab Technician all qualify at the 100% level for their respective wages. Even though the Software Developer and Technician spent some time on non-research tasks, their research-related work exceeded the 80% threshold.

The Junior Draftsman and Engineering Manager do not meet the 80% threshold. Therefore, PMS must carefully allocate only the specific percentage of their time spent on research-related tasks. For the Draftsman, 50% of his wages are included as direct support. For the Manager, 40% of her wages are included as direct supervision.

Calculation and Refundability Analysis

PMS elects the ASC method for the 15% Oregon Semiconductor R&D Credit.

Because PMS has fewer than 150 employees, they are eligible for the 75% refundability tier. If PMS has a total tax liability of only $10,000, they would use the credit to offset that liability and then receive a refund for 75% of the remaining credit amount.

Remaining Credit = $210,000 – $10,000 = $200,000

Refund Amount = $200,000 × 0.75 = $150,000

The remaining $50,000 (the 25% non-refundable portion) is carried forward for up to five years to offset future tax liabilities.

Future Outlook and Strategic Recommendations

The Oregon R&D tax credit is currently in a phase of aggressive expansion, particularly for high-tech manufacturing. The sunset date of December 31, 2029, for the semiconductor credit provides a clear window for companies to invest heavily in the state.

Strategic Documentation Practices

To maximize “direct support” claims, companies should implement project-level accounting. This involves not only tracking time but also documenting the “technical nexus.” For every support person included in the claim, the company should have a brief narrative explaining how that person’s specific tasks enabled the engineers to eliminate technical uncertainty.

Companies should also monitor the 80% threshold closely. If a key support person is at 75% research time, it may be beneficial to shift their duties slightly to reach 80%, thereby capturing an additional 25% of their total wage for the credit calculation.

Navigating the Certification Landscape

The requirement for annual certification from Business Oregon adds an administrative layer that necessitates early planning. Applications must be based on actual and projected QREs, and the October 15 deadline is firm. Taxpayers should work with their tax advisors to ensure the “description of activities” in the certification application aligns perfectly with the “four-part test” requirements of IRC Section 41 to avoid delays or denials.

Impact of the Corporate Activity Tax (CAT)

Taxpayers should also be aware that Oregon’s Commercial Activity Tax (CAT) interacts with R&D credits. While the R&D credit typically offsets corporate excise or personal income tax, the 2023 legislation exempts the amount of the research credit allowed against the excise tax from the commercial activity subject to the CAT. This “exemption on top of a credit” further enhances the value of R&D investment in the state.

Final Thoughts

In summary, the meaning of “directly supporting research” within the Oregon tax framework is a vital, task-oriented classification that bridges the gap between high-level engineering and the practical labor of the laboratory. By following federal definitions and state-specific administrative guidance, and by maintaining rigorous documentation, Oregon businesses can leverage these support roles to significantly enhance their innovation-related tax benefits.