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Definition of Energy Research

IRC §41(f)(5) defines energy research as research that meets the definition of qualified research under IRC §41(d) and relates to energy. It must be conducted within the United States, Puerto Rico, or U.S. possessions. Research conducted outside these jurisdictions is not eligible.

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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.

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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).

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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

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Energy Research Consortium

An energy research consortium generally refers to a nonprofit organization that is tax-exempt under IRC §501(c)(3) and not a private foundation, and is primarily operated to conduct energy research. To qualify under IRC §41(a)(3), the organization must meet the following criteria:

• At least five unrelated persons or entities must contribute to the organization during the tax year.

• No single contributor may provide more than 50% of the total contributions received by the organization.

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Energy Research Payments

Under IRC §41(a)(3), payments made by a taxpayer in the course of their trade or business to an energy research consortium for qualified energy research are eligible for the Energy Research Consortium Tax Credit. These payments may include:

• Cash contributions

• Reimbursements

• Investment arrangements

• Other cash or non-cash transfers

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Important Note: Expenses claimed under the Energy Research Consortium Credit cannot also be claimed under the general R&D credit or the Basic Research Credit. However, if a taxpayer chooses not to claim the energy research credit, they may elect to treat these expenses as contract research expenses under the general R&D credit at a more favorable rate of 75% instead of the standard 65%.

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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%”.​

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(1) Eligible Small Business;

• Defined under IRC §41(b)(3)(D)(ii)-(iii) as entities with 500 or fewer employees on average during one of the two preceding calendar years.

• The taxpayer must not own 50% or more of the small business (by vote or value for corporations, or capital/profit interest for partnerships).​

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

Defined under IRC §3304(f) as nonprofit or public institutions that:

• Admit students with high school diplomas or equivalents

• Are authorized to provide post-secondary education

• Offer programs leading to degrees or gainful employment

 

(3) Federal Laboratories

• Defined under the Stevenson-Wydler Technology Innovation Act of 1980 (15 U.S.C. §3703(6)) as federally funded research centers or cooperative research centers operated by or for federal agencies.

• 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

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

Under IRC §41(b)(3)(C)(i)-(ii), taxpayers may claim 75% of qualified research expenses for payments made to qualified research consortia, which include:

• Organizations described in IRC §501(c)(3) or §501(c)(6)

• Exempt from tax under IRC §501(a)

• Organized and operated primarily to conduct scientific research

• Not private foundations​

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These payments must be for qualified research conducted on behalf of the taxpayer and at least one unrelated taxpayer. Controlled group rules under IRC §52(a) and (b) apply to determine relatedness.​