Your Cloud Computing Bill Might Qualify for R&D Tax Credits
Summary
IRC §41(b)(2)(A)(iii) allows businesses to count amounts paid for the right to use computers in qualified research as Qualified Research Expenditures (QREs). This provision has existed since 1986 and has not been updated since 1989. These regulations, therefore, do not mention cloud computing, SaaS platforms, or modern computer infrastructure, creating both an opportunity and uncertainty for businesses that use third-party computing resources in their R&D work. Working with an R&D tax credit specialist is essential to evaluate which of these costs qualify and how to document that properly before filing.
What the Law Says
If your engineering team runs workloads on AWS, uses a SaaS platform to run experiments, or pays for cloud compute[GE1.1][GE1.2] tokens to train machine learning models, you may be sitting on a category of R&D tax credits you have never claimed. And you are not alone; most businesses have not heard of the computer rental provision in IRC §41, let alone tried to apply it to a modern tech stack.
The provision itself is real and has been in the tax code since 1986. The challenge is that the regulations defining it have not been updated since 1989, before the internet, before cloud computing, before the word "SaaS" existed. That gap between the law as written and the technology businesses use today is the subject of growing attention among R&D tax credit professionals, and it represents a genuine planning opportunity for companies willing to engage with it carefully.
IRC §41 defines QREs as means the sum of the following amounts which are paid or incurred by the taxpayer during the taxable year in carrying on any trade or business of the taxpayer - (A) in-house research expenses, and (B) contract research expenses.
A fourth category sits in IRC §41(b)(2)(A)(iii): amounts paid or incurred for the right to use computers in the conduct of qualified research. Congress added this provision in the Tax Reform Act of 1986, specifically because small businesses often could not afford to purchase or lease dedicated research computers when they first became widely available. The intent was to ensure that paying for access to computing power, rather than owning it outright, could still count toward the credit.
This was followed up in 1989 by Treas. Reg. §1.41-2(b)(4), which established three requirements for rental costs to qualify as QREs.
1. The computer must be owned and operated by someone other than the taxpayer.
2. The computer must be located off the taxpayer’s premises.
3. The taxpayer must not be the computer’s primary user.
These three requirements have not changed. The regulations that contain them were written in an era when “using a computer” meant a terminal in your office connecting to mainframe in someone else’s building – fact patterns which may also apply to modern cloud hosting and leveraging foundation models to develop new or improved products.
What Has Changed Since 1989
The short answer: everything.
In 1989, the dominant computing model for research purposes involved time-sharing. A business would rent access to processing time on a large central computer owned by a third-party, and the terminal in the office was just an interface. The “real” computing happened elsewhere, on hardware you didn’t own, at a location weren’t at. The three-part test described that arrangement exactly.
In today’s business world, a research team at a software company might run experiments on AWS EC2 instances, store data in S3, coordinate jobs using a SaaS orchestration platform, and never touch a piece of physical hardware they own. A biotech firm might use a cloud-based genomics platform where the “computer” is a distributed cluster spanning hundreds of servers across multiple data centers. A manufacturer doing simulation work might license specialized engineering software that runs partly on local machines and partly on vendor infrastructure.
In each of these cases, something that looks like the spirit of IRC §41(b)(2)(A)(iii) is happening. A business is paying a third party for the right to use computing resources in qualified research, because owning that infrastructure outright would be prohibitively expensive or impractical. But whether the modern arrangement satisfies the 1989 regulations can be nuanced.
Why the Three-Part Test Can Be Complicated
Who Owns and Operates the Computer?
On the surface, this first requirement seems straightforward for cloud computing. Amazon owns the servers behind AWS. Microsoft owns the servers behind Azure. The taxpayer does not.
The complication falls in the definition of what “the computer” is. In 1989, the answer was simple: the central processing unit, physically located at a specific address, owned by a specific entity. In 2026, when a company runs a workload on AWS, it might be using a mix of virtualized compute, third-party containers, managed databases, and serverless functions, with the actual hardware being pooled, shared, and dynamically allocated across thousands of customers in real time.
The taxpayer’s own laptop or workstation is also technically a computer, and the taxpayer clearly owns and operates it. If “the computer” means the local device, then the first test is failed immediately. But treating the user’s device as the relevant computer does not account for the fact that the local device is simply an interface, exactly as the terminals of the 1980s were. The actual computing is happening on the infrastructure the taxpayer does not own.
The definitional ambiguity does not have a clean answer under current guidance. The IRS Audit Techniques Guide for IRC §41 (updated in June 2025) lists the computer rental provision but does not address cloud computing or define what qualifies as “the computer” in a modern context.
Where is the Computer Located?
Under a pure SaaS model where a company pays for access to software hosted and operated entirely by a third party, the “computer” is clearly off the taxpayer’s premises. The servers are in someone else’s data center.
The question gets harder in hybrid situations. A company might license specialized research software, but data security reasons require them to host that software on its own servers. The taxpayer does not own the software, just licenses it, but the hardware running it sits on-site. Does that put the computer on the taxpayer’s premises? The current regulation does not address this scenario.
Is the Taxpayer the Primary User?
The third requirement was designed to prevent businesses from claiming the credit for computing resources that they dominated. In the time-sharing era, that was measurable; if you were the only client using the machine, you were its primary user.
Modern cloud infrastructure is multitenant by design. When a company runs a workload on a cloud provider’s servers, those same servers are simultaneously serving hundreds of thousands of other customers. By that logic, the taxpayer is almost never the primary user of the underlying hardware.
But the question of how a taxpayer can verify or document this to the IRS’s satisfaction remains open. The current regulations don’t provide a method for measuring primary use in a cloud computing context. There is no guidance on whether a taxpayer needs to obtain certifications from a cloud provider, review server allocation logs, or satisfy the requirement by some other means.
What Treasury Has and Hasn’t Done
In 2025, Treasury issued T.D. 10022, final regulations governing the classification of cloud transactions and digital content transactions for specified international tax provisions. By characterizing cloud transactions as services, those regulations affect the application of existing sourcing rules while recognizing that older tax frameworks did not neatly fit modern technology arrangements.
Treasury has not, however, issued proposed or final regulations updating Treas. Reg. §1.41-2(b)(4) to address cloud computing. Nor has it issued guidance specifically applying the computer rental provision of IRC §41(b)(2)(A)(iii) to LLMs, Infrastructure as a Service (IaaS), Platform as a Service (PaaS), SaaS, or similar cloud service models.
As a result, the statute remains broad enough to potentially encompass modern computing costs, while the 1989 regulations continue to reflect concepts that do not map neatly onto today's cloud-based computing environment.
What This Means for Your Business
If your company does qualified research and uses third-party computing resources to do it, the provision deserves a careful look. The potential QRE categories include costs like:
● Cloud infrastructure fees (AWS, Azure, Google Cloud) used for research workloads
● SaaS platforms used to run experiments, simulations, or testing
● Licensed software used for engineering, scientific, or technical research that runs on third-party infrastructure
● Specialized computing platforms in biotech, genomics, materials science, and similar fields
● LLM tokens used to develop new or improved software
This is not a simple situation; the regulatory ambiguity is real, and any position taken here requires careful analysis, documentation, and clear record of how the three-part test applies to your specific arrangements. The IRS has not provided a clear roadmap for cloud computing, which means the analysis must be built from the statute, the existing regulations, and the analogous guidance Treasury has issued in other contexts.
What an R&D Tax Credit Specialist Can Do
This kind of very specific and nuanced regulation is precisely the reason why a qualified R&D tax credit specialist is vital in making sure that a claim is documented and filed properly. Someone who is experienced in evaluating your technology stack, applying the statutory framework, and documenting the position in a way that holds up under scrutiny will be sure that your claim can and will stand up to IRS examination.
RK Partners focuses exclusively on R&D tax credits. Our tax attorneys, CPAs, technical engineers and consultants are all highly trained experts who evaluate the full picture of your qualifying activities and expenses, including categories like computer rental costs that many businesses haven’t even considered exploring.
We do the heavy lifting. We conduct interviews, analyze data, and compile documentation, along with providing filing support. We’ve worked with hundreds of companies in a large array of industries, and we know exactly what the IRS looks for. If your business uses third-party computing resources in its research work, contact us for a no-risk consultation.
