Can Cloud Computing Costs Qualify for the R&D Tax Credit? Yes, If You Do This.

Cloud Costs and R&D Credits: A Growing Opportunity and a Big Risk

More and more companies rely on cloud computing to run critical parts of their R&D process. Whether it’s simulation, modeling, AI/ML training, or software development, cloud services now sit at the core of many innovation efforts.

But here’s the challenge: can you claim cloud computing costs as qualified research expenses (QREs) for the R&D tax credit?

The answer is yes… but only under the right circumstances, with careful structuring and support.

In this post, we’ll walk through:

• What the law and regulations say
• How different types of cloud computing are treated
• How to position your cloud costs for maximum defensibility
• Key actions tax teams should take now

The Legal Landscape: Outdated Rules in a Modern World

The core statute is Section 41(b)(2)(A)(iii) of the Internal Revenue Code. It allows QRE treatment for:

“Any amount paid or incurred to another person for the right to use computers in the conduct of qualified research.”

This provision was originally designed in the pre-cloud era to help smaller companies that couldn’t afford to buy mainframes or servers outright.

The corresponding Treasury Regulation (1.41-2(b)(4)) is also narrow, allowing QRE treatment only for:

• Computers owned and operated by someone other than the taxpayer
• Located off the taxpayer’s premises
• Where the taxpayer is not the primary user of the computer

This regulatory language has not kept pace with modern cloud business models, creating uncertainty and audit risk for taxpayers.

Standard Cloud Computing: A Strong Case

In typical public cloud computing, for example using AWS, Microsoft Azure, or Google Cloud:

• Servers are owned and operated by the cloud provider.
• They are located off the taxpayer’s premises.
• The taxpayer’s workload is routed dynamically across shared infrastructure, making it hard to argue the taxpayer is the “primary user” of any specific server.

This fact pattern aligns well with the requirements of Section 41(b)(2)(A)(iii) and the Treasury Regulation.

Many companies are already successfully claiming these cloud costs as QREs.

Best Practice

• Carefully document how your cloud provider allocates resources.
• Maintain purchase records and technical descriptions showing that the services used meet the statutory and regulatory tests.
• Link cloud costs clearly to qualified research projects and business components.

Private Cloud Computing: More Complex, Still Possible

Things get trickier with private cloud arrangements, where a company pays for dedicated servers, often for security or regulatory reasons.

In these cases:

• The taxpayer may inspect or help maintain the servers.
• The servers may be dedicated exclusively to the taxpayer’s use.

This raises questions about whether the taxpayer is now the primary user or even the effective operator of the hardware.

However, there are many fact patterns where QRE treatment is still viable:

• If the taxpayer is essentially renting capacity in a large data center, with flexible use of multiple servers (rather than one dedicated box used 24/7), the analogy to classic time-sharing still holds.
• If the taxpayer’s use of any specific server does not exceed 50% of its useful life, you have a stronger case.

Best Practice

• Document the terms of the cloud contract carefully.
• Show that the taxpayer does not operate or primarily control the physical servers.
• Demonstrate that server allocation is dynamic and governed by the cloud provider—not by the taxpayer.

Pilot Models and Cloud: A Powerful Alternative Path

There’s another path that many companies overlook:

Section 41(b)(2)(A)(ii) allows QRE treatment for:

“Any amount paid or incurred for supplies used in the conduct of qualified research.”

If your cloud spend is used to run a pilot model. For example testing a prototype software platform or running simulations as part of product development, you may be able to claim those costs as supply costs instead of under the cloud computing provision.

This can be particularly attractive for industries like aerospace, automotive, semiconductors, and advanced manufacturing where simulation-driven R&D is common.

Best Practice

• When using cloud to run a pilot model, classify costs carefully in your study.
• Maintain clear technical documentation showing how the cloud usage supports prototype or pilot model development.
• Consult with your tax advisor to structure this properly.

What Tax Teams Should Do Now

Cloud computing is an increasingly large part of modern R&D. The good news is that you can claim these costs, but you need to do it thoughtfully.

Here’s where to start:

1. Map Cloud Usage to Business Components

Work closely with your engineering and IT teams to map cloud spend to specific qualified business components. This will strengthen the nexus between cost and credit.

2. Align Documentation to Current Expectations

Even though the Treasury Regulations are outdated, IRS exam teams are now demanding granular activity-level documentation across the board. See Optimizing Your R&D Tax Credit Process Using Today’s Technology for ways to streamline and strengthen this documentation effort.

3. Train SMEs on What Counts and What Doesn’t

Your SMEs play a critical role in explaining how cloud costs support qualified research. MASSIE’s How to Train SMEs for R&D Tax Documentation offers practical tips for preparing them to contribute defensibly.

4. Monitor Policy Developments

This area is evolving. The IRS has not updated its regulations for the cloud era, but future guidance may clarify (or restrict) what counts. Stay informed and be ready to adjust your approach.

Bottom Line

Cloud computing is no longer a niche expense; it’s at the heart of how many companies conduct R&D. With the right structuring and documentation, these costs can contribute meaningfully to your R&D tax credit.

If your team would like to review how your cloud spending is currently treated or explore strategies to strengthen your credit claims, we’re here to help. Contact us for a consultation.

Jason Massie, CPA, Esq.

As the Founder and President of MASSIE R&D Tax Credits, Jason is responsible for the quality, consistency, and integrity of our services. His strategic vision and leadership drive innovation within the company, encouraging collaboration and ne...