Fed R&D Tax Credit: Energy Consortium Tax Credit

Energy Research Consortium Tax Credit

The Energy Policy Act of 2005 (Public Law 109–58), in an effort to stimulate energy-related research and development (R&D), added a new component to the increasing research activities tax credit by establishing an energy research consortium credit equal to 20% of amounts paid or incurred by a taxpayer, including contributions, to an energy research consortium ("outside consultant") for qualified energy research under IRC § 41(a)(3). This energy research credit is not subject to the incremental determination as the traditional R&D tax credit or basic research credit calculated. Instead, it is a flat credit equal to 20% of the total amount of qualifying expenditures. However, aggregation of expenditures rules for "control group" calculations may still apply pursuant to IRC § 41(1).

In general, to be considered an energy research consortium ("outside consultant") performing contracted qualified research for energy research on behalf of the taxpayer, it must be a 501(c)(3) tax-exempt organization ("non-profit") that’s operated primarily to conduct energy research. The organization can not be a private foundation and must conduct its research for the public interest. In addition, at least five unrelated persons or entities must pay or incur amounts, including contributions, to the organization during the tax year, and no single person or entity may pay or incur more than 50% of the total amounts received by the organization.
 

The credit also applies to the full amount (i.e., 100%) of payments to colleges and universities, federal laboratories, and certain small firms for energy research performed under contract. In the case of small firms performing this research, a business taxpayer may claim a credit for the full amount of payments with two limitations. First, the taxpayer cannot own 50% or more of the stock of the small firm performing the research (if the firm is a corporation), or hold 50% or more of the small firm’s capital and profits (if the firm is a non-corporate entity such as a partnership). Second, the firm performing the research must have an average of 500 or fewer employees in one of the two previous calendar years.

The Energy Research Consortium tax credit can be taken in addition to the (1) "traditional" R&D tax credit and (2) the Basic Research tax credit. Because the Energy Research Consortium tax credit is flat rather than incremental, it is generally more generous than the other two credit components (R&D credit, Basic Research credit) of the Section 41 tax credits available to U.S. taxpayers. However, any amounts claimed as qualified energy research for the Energy Research Consortium tax credit cannot also be claimed simultaneously for either the general research tax credit or the basic research tax credit using the same qualified expenses pursuant to § 41(f)(D). As such, taxpayers wanting to claim the Energy Research Consortium credit should segregate these costs and examine them thoroughly to effectively substantiate a claim for the credit.


Many taxpayers in the oil and gas, manufacturing, chemical manufacturing and utilities industries might not be taking full advantage of the energy research consortium credit, and should be considered when evaluating tax credit incentive opportunities. Below further describes the components, definitions, and details when investigating potentially qualified energy research expenses and how the credit is calculated.

Energy Research

IRC § 41(f)(E) defines the term “energy research” as not including any research which is not qualified research (as defined in IRC § 41(d)). IRC § 41(f)(C) also states for purposes of energy research credit, amounts paid or incurred for any energy research conducted outside the United States, the Commonwealth of Puerto Rico, or any possession of the United States shall not be taken into account.

Although the term “energy research” does have additional context and explanation regarding its definition within the code or applicable treasury regulations to claim the energy research credit, presumably, energy research must somehow relate to energy. This may include all types of energy, such as electric, oil and gas, nuclear, atomic, and other types of energy undergoing experimentation during qualified research activities.

As such, taxpayers making payments to qualified energy consortia to improve the efficiency of household lighting or to develop new refining methods to increase fossil fuel yield should investigate whether their payments may potentially qualify for the energy research consortia credit. Again, the only stipulation is that energy research must meet the definition of qualified research under IRC § 41(d).

The following are some examples of potentially qualified energy research:

  • Improving household appliance energy efficiency

  • Creating new energy storage systems (e.g., battery technology)

  • Establishing power conversion systems (solar conversion, wind turbines)

  • Improving fossil fuel extraction methods (oil, mining, & gas industries)

  • Formulating and testing new biofuels

  • Developing enhanced refining methods to improve batch yield

  • Developing new building controls software to increase energy efficiency

  • Researching intelligent grid technologies

  • Enhancing transmission systems capacity

  • Improving the energy efficiency of vehicles, machinery and other technology

Energy Research Consortium

In general, energy research consortium(s) include organizations, other than private foundations, that are tax exempt under IRC § 501(c)(3). The organizations must be operated primarily to conduct energy research. At least five unrelated persons must have made contributions to the organization for energy research during the year and no single person can have contributed 50% or more of the total amounts received by the organization during the year.

Energy Research Payments

IRC § 41(a)(3) states "amounts paid or incurred by the taxpayer in carrying on any trade or business of the taxpayer during the taxable year (including as contributions) to an energy research consortium for energy research" represent the types of payments eligible for the energy research credit. As such, payments may potentially include investment arrangements, reimbursement arrangements, contributions, and other cash and non-cash transfers. As mentioned above, in general, 100% of payments to colleges and universities, federal laboratories, and certain small firms for energy research performed under contract (as further outlined below). 

Note, any expenses included in the energy research consortium credit can not also be claimed as qualified contract research for purposes of the general research credit (alternative simplified or regular method credit) or basic research credit. However, a taxpayer who doesn’t wish to use the energy research consortium credit may elect to take these expenses as contract research expenses at a rate of 75% (see "Paid to Certain Qualified Research Consortia" section below) instead of the traditional 65% in the general research credit.​

Below outlines the types of energy research contracting payments to qualified energy research consortium which may qualify for the energy research credit or which may be claimed at a more beneficial qualification percentage for contract research activities if instead only claiming the general research tax credit.

Research Contract Expenses: Paid for "Energy Research" to Eligible Small Businesses, Universities, or Federal Laboratories (100% Qualification)

Pursuant to Sec. 41(b)(3)(D)(i), in general, contracted expenses incurred in the U.S. relating to amounts paid by the taxpayer to (1) Eligible Small Business, (2) Institution of Higher Education, or (3) Federal Laboratory, regardless of the success of the research, for qualified research which is ENERGY RESEARCH, qualified contract research expense activities shall be qualified by substituting “100%” for “65%”.​

(1) Eligible Small Business;

  • IRC § 41(b)(3)(D)(ii) defines the term “eligible small business” means a small business with respect to which the taxpayer does not own (within the meaning of section 318) 50% or more of—

    • in the case of a corporation, the outstanding stock of the corporation (either by vote or value), and

    • in the case of a small business which is not a corporation, the capital and profits interests of the small business.

  • IRC § 41(b)(3)(D)(iii)(I) defines the term “small business” means, with respect to any calendar year, any person if the annual average number of employees employed by such person during either of the 2 preceding calendar years was 500 or fewer. For purposes of the preceding sentence, a preceding calendar year may be taken into account only if the person was in existence throughout the year

(2) Institution of Higher Education (as defined in section 3304(f)); or

  • 3304(f) states the term “institution of higher education” means an educational institution in any State which—

    • (1)admits as regular students only individuals having a certificate of graduation from a high school, or the recognized equivalent of such a certificate;

    • (2)is legally authorized within such State to provide a program of education beyond high school;

    • (3)provides an educational program for it which awards a bachelor’s or higher degree, or provides a program which is acceptable for full credit toward such a degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and

    • (4)is a public or other nonprofit institution.

(3) Organization which is a Federal Laboratory.

  • 41(b)(3)(D)(iv) defines the term “Federal laboratory” as provided by section 4(6) of the Stevenson-Wydler Technology Innovation Act of 1980 (15 U.S.C. 3703(6)), as in effect on the date of the enactment of the Energy Tax Incentives Act of 2005. 

  • Section 4(6) of the Stevenson-Wydler Technology Innovation Act of 1980 defines "Federal laboratory’’ as any laboratory, any federally funded research and development center, or any center established under section 7 ("Cooperative Research Centers") or 9 ("National Science Foundation Cooperative Research Centers") of this Act that is owned, leased, or otherwise used by a Federal agency and funded by the Federal Government, whether operated by the Government or by a contractor

Research Contract Expenses: Paid to Certain "Qualified Research Consortia" (e.g. Non-Profits) (75% Qualification)

Pursuant to Sec. 41(b)(3)(C)(i), contracted expenses incurred in the U.S. relating to amounts paid by the taxpayer to a qualified research consortium outside consultants, regardless of the success of the research, shall be qualified by substituting “75%” for “65%” with respect to amounts paid or incurred by the taxpayer to a qualified research consortium for qualified research on behalf of the taxpayer and 1 or more unrelated taxpayers. For purposes of the preceding sentence, all persons treated as a single employer under subsection (a) ("Controlled group of corporation") or (b) of section 52 shall be treated as related taxpayers.

41(b)(3)(C)(ii) defines the term “qualified research consortium” to mean any organization which—

  • is described in section 501(c)(3) or 501(c)(6) (i.e. "non-profit") and is exempt from tax under section 501(a),

  • is organized and operated primarily to conduct scientific research, and

  • is not a private foundation.

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