The inclusion of executive compensation, particularly CEO salary, within Qualified Research Expenses (QREs) for the Internal Revenue Code (IRC) Section 41 Research Tax Credit is a high-risk strategy that demands immaculate compliance and substantiation. The foundational eligibility standard dictates that QREs must include only “Employee wages for qualified services performed by such employee”.1 Qualified services are narrowly defined as the direct conduct, direct supervision, or direct support of qualified research. For C-suite executives, a significant hurdle exists because their activities often reside within the realm of General and Administrative (G&A) overhead, encompassing strategic planning, financial oversight, and investor relations. The burden of proof rests entirely on the taxpayer to rigorously demonstrate that the claimed portion of the executive’s time transcended routine corporate governance, providing genuine technical contribution necessary to resolve specific technical uncertainties inherent to the qualified research projects. Without this meticulous segregation, the IRS will default to the presumption that such high-level compensation is non-qualifying G&A expense.2
The most significant regulatory barrier to claiming executive R&D wages lies in the stringent definition of “Direct Supervision.” Treasury Regulations explicitly restrict this category to “immediate supervision (first-line management)” of qualified research activities.3 Critically, the regulation further specifies that “Direct supervision” explicitly “does not include supervision by a higher-level manager to whom first-line managers report,” even if that higher-level manager possesses a scientific or technical background.2 Because a Chief Executive Officer (CEO) typically reports only to a Board of Directors, their position inherently places them outside the eligible chain of command for standard supervisory claims. While the IRS Audit Technique Guide (ATG) acknowledges that higher-level research managers may perform a “minor fraction of their overall work activities” in qualified research or immediate supervision, the organizational structure creates a strong, rebuttable presumption of G&A activity. Consequently, any claimed executive time must be meticulously justified as technical engagement rather than general managerial oversight of the research department budget or personnel.2
Given this extreme regulatory scrutiny, the defense of executive QREs relies entirely on granular, systematic substantiation. The Internal Revenue Service requires taxpayers to “retain records in a sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the credit”.4 Post-hoc estimates or generalized time allocations are inadequate for highly compensated employees. Specialized advisory firms, such as Swanson Reed, employ detailed time-allocation methodologies—often powered by advanced tools like CreditARMOR and TaxTrex—to meet this standard. These technologies facilitate the contemporaneous, highly granular recording of time, linking specific minutes of activity directly to verified qualified research projects and the resolution of technical uncertainties. This rigorous, systematic record-keeping provides the necessary high-fidelity evidence, transforming generalized executive compensation into audit-defensible QREs and significantly mitigating the risk of disallowance and associated penalties.5
The calculation of the R&D Tax Credit is based on the quantification of Qualified Research Expenses (QREs), which the IRS defines as the sum of in-house research expenses and contract research expenses.1 In-house research expenses primarily include the costs of employee wages for qualified services, supplies used to conduct qualified research, and costs for computers used in the research activity.1
Executive compensation is captured under the wages component, which elevates its compliance risk profile. While costs for supplies and computer usage are generally passive inputs that require less functional scrutiny, claimed wages—especially those associated with high salaries—are active inputs demanding a meticulous functional review. The functional test requires clear evidence that the activity meets the four-part test of Section 41, which includes demonstrating that the activity sought to discover information that is technical in nature, intended to eliminate technical uncertainty, and undertaken as part of a process of experimentation. The inclusion of executive compensation must not only meet this technical standard but also overcome the substantial burden of proving that the time spent was not general overhead.
To qualify, an employee’s services must fall into one of three specific categories: direct conduct, direct supervision, or direct support of qualified research. Treasury Regulation § 1.41-2 provides crucial definitions that determine the eligibility of executive time.
Direct Support involves services essential to the performance of qualified research, but which may not constitute the actual research itself. An example provided in the regulations is the services of a machinist who fabricates a part for an experimental model.2 However, the definition of Direct Support explicitly excludes “general and administrative services, or other services only indirectly of benefit to research activities”.2 This regulatory distinction presents a significant challenge for executives. For example, a CEO participating in a specific, hands-on technical design review to solve a critical functional uncertainty might argue for Direct Support or Direct Conduct time. Conversely, a CEO approving financial resources for the research team is engaging in G&A activities. Because a high-level executive’s primary function is typically resource allocation and strategic management, any Direct Support claim is inherently tenuous and necessitates exceptional documentation to delineate the technical intervention from routine administrative governance.
Treasury Regulation § 1.41-2(d)(2) establishes the “substantially all” rule: if 80% or more of an employee’s services performed during the taxable year consist of qualified services, then 100% of the employee’s wages may be treated as qualified wages.2 This provision provides a simplified inclusion method, but it is rarely, if ever, applicable to C-suite executives.
A CEO’s comprehensive responsibilities, including duties such as shareholder meetings, investor relations, mergers and acquisitions strategy, and overall legal compliance, prevent them from satisfying the 80% threshold. Relying on the ‘substantially all’ rule for a CEO salary immediately signals a significant audit risk to the IRS. Therefore, for executive compensation, the only viable methodology for claiming QREs is through precise, granular allocation, requiring continuous and detailed time tracking to ensure only the documented technical fraction of compensation is included.
The IRS actively trains its examiners to scrutinize highly compensated individuals, especially those with managerial roles that are elevated above first-line supervision. The Audit Technique Guide (ATG) directs examiners to pay specific attention to “management levels higher than first-line supervisors” who may not directly supervise qualified research activities.2 The premise underlying this scrutiny is that the executive function often serves to solve business uncertainty (e.g., market risk, profitability, financing) rather than technical uncertainty (e.g., material compatibility, algorithm efficiency), which is the criterion for QRE eligibility.
The corporate hierarchy functions as a rebuttable presumption of G&A activity. To overcome this presumption, the taxpayer must furnish documentary evidence that demonstrates a functional bypass of the organization’s routine reporting structure for specific technical problem-solving. This evidence must delineate when the CEO ceased acting as an administrator and began acting as a technical expert or immediate supervisor, a distinction that requires objective, detailed record-keeping rather than subjective recollection.
The restriction on direct supervision is the most potent regulatory weapon used by the IRS against executive wage claims. As established, the term “direct supervision” is strictly limited to the “immediate supervision (first-line management)” of qualified research activities.2 The clear regulatory exclusion of supervision by managers to whom first-line supervisors report creates a major limitation on claims for high-level executives.3
If executive time is claimed without the required hyper-granular segregation and contemporaneous support, the deficient substantiation not only jeopardizes the executive’s own wages but can also cast doubt on the overall integrity of the entire R&D claim. Auditors may infer that if the executive’s time is improperly tracked, the R&D activities of their subordinates may also be poorly defined or non-qualified. This “tainted claim” effect can lead to the disallowance of the entire credit, resulting in additional taxes, penalties, and interest charges.5
The core challenge in substantiating executive QREs is distinguishing technical activity from high-level managerial duties. Activities most frequently challenged by the IRS include strategic business reviews, financial forecasting related to R&D expenditures, general personnel management, and routine status meetings that focus on deadlines rather than technical uncertainties.
The critical distinction is rooted in the purpose of the activity: resolving technical uncertainty constitutes qualified research, whereas addressing business uncertainty, such as product marketability or quarterly performance metrics, constitutes G&A overhead. The following table provides a clear delineation of how common executive functions are classified by the IRS for QRE purposes, highlighting the associated documentation requirements necessary to defend an eligible claim.
Executive Activities: Qualified vs. Non-Qualified Time Allocation Mapping
| CEO Activity Description | Qualified Service Category (IRC § 41) | Eligibility Status | Substantiation Requirement/Audit Risk |
| Reviewing and approving modifications to fundamental scientific algorithms (Immediate oversight of technical staff) | Direct Supervision / Direct Conduct | HIGHLY Eligible (QRE) | Requires contemporaneous, detailed time entries linked to specific technical goals and compliance with the 4-part test. Must prove first-line supervision bypass. |
| Approving the annual R&D capital expenditure budget for equipment acquisition | General & Administrative (G&A) | INELIGIBLE (Overhead) |
Strategic financial oversight, not tied to the physical performance of research.2 |
| Briefing the Board of Directors on the commercial strategy for the patented technology | General & Administrative (G&A) | INELIGIBLE (G&A) |
High-level corporate management function, explicitly excluded by regulation.3 |
| Troubleshooting a technical manufacturing defect on a prototype with the lead engineer and providing immediate technical direction | Direct Supervision / Direct Support | Partially Eligible (QRE) | Must be clearly segregated from routine management; defensible only with granular time data and corresponding technical records. |
Substantiation is the bedrock of any successful R&D tax credit claim, but it is especially critical for high-risk executive compensation. The statutory requirement dictates that documentation must “tell a complete story about your research activities”.5 Traditional methods often rely on post-hoc evidence, such as year-end interviews or approximations of time allocation, which the IRS frequently challenges as insufficient for high-stakes claims. These subjective methods fail to meet the standard of systematic, detailed record-keeping required to support wages claimed as QREs.4 For executive compensation, the standard of proof demands contemporaneous evidence—time tracking data recorded as close to the activity as possible—to effectively counter the IRS’s initial skepticism regarding the executive’s functional role.
Specialized consultants, such as Swanson Reed, employ proprietary technology to elevate the quality of documentation to an audit-defensible standard. Tools like CreditARMOR and TaxTrex are described as advanced R&D tax credit and AI management tools designed to manage compliance and risk throughout the audit continuum.6 These systems provide the necessary technological framework to enforce granular, systematic time tracking among executives.
Instead of relying on broad monthly estimates, these methodologies require executives to log specific time blocks (e.g., in 15-minute increments) linked directly to verifiable, qualified research projects and the resolution of stated technical uncertainties. TaxTrex specifically includes functionality for “Managing time,” “Adding staff time,” and a “Substantiation Tracker”.6 The automated or facilitated process of using a Substantiation Tracker ensures that the documentation for high-risk wages meets internal audit criteria—generating the systematic, detailed records required by the IRS to withstand intense scrutiny.4 This systematic data creation transforms inherently high-risk, subjective allocations into objective, quantifiable evidence.
Beyond data capture, sophisticated methodologies incorporate multi-layered validation designed to minimize regulatory exposure. Swanson Reed’s process includes a rigorous internal review, often referred to as the “Six-Eye Review,” mandated to ensure every claim is “technically sound, financially accurate, and compliant with tax law, maximizing defensibility”.6 This review requires mandatory input from a qualified engineer, a scientist, and a CPA or Enrolled Agent.
For executive QREs, this layered approach is essential. The engineer and scientist confirm the technical validity—i.e., confirming that the claimed activity genuinely met the Direct Supervision or Direct Conduct threshold required to overcome the “higher-level manager” exclusion.3 Concurrently, CreditARMOR’s advanced AI language model actively reviews the claim data to identify potential IRS audit risks before submission.6 The AI flags anomalies, such as a high claimed percentage of QRE time for an executive without correlating technical outputs or without adequate documentation segregation, allowing for immediate remediation and refinement of the claim. This combined human-technical validation provides the highest available level of audit assurance.
When an R&D tax credit claim is audited, the IRS issues Information Documentation Requests (IDRs) seeking detailed evidence. For executive wages, the IDR response must be exceptionally robust and systematic. Consulting technology like CreditARMOR assists companies in preparing these IDRs, often by generating an audit assurance report that simulates an IRS examination, identifying potential risk issues and recommending ways to reduce them.6
The defense strategy must present the executive’s time as a continuous, systematic process. The response must not merely provide time logs, but must link those logs directly to project documentation that proves the executive’s specific technical input was indispensable to resolving a fundamental technical uncertainty. By relying on contemporaneous data collected through granular methodologies, the taxpayer can present verifiable evidence that overrides the regulatory presumption that the CEO’s time is general management and establishes that the claim adheres strictly to the regulatory confines of “immediate supervision” or “direct conduct”.3
The financial consequence of defending a high-stakes R&D claim, particularly one involving large executive salaries, can be substantial, including fees for CPAs, tax attorneys, and specialized consultants required to navigate complex litigation.6
CreditARMOR offers an integrated insurance solution that covers these substantial costs.6 For claims involving high-risk areas like executive QREs, the availability of comprehensive audit defense coverage is a crucial indicator of the underlying methodology’s quality. This demonstrates that the documentation structure used by the consultant is sufficiently robust to satisfy the underwriter’s risk assessment. By transferring the financial burden of a compliance dispute to an insurance provider, companies can focus resources on innovation rather than protracted regulatory conflicts.6
The regulatory environment surrounding the inclusion of CEO salary as a Qualified Research Expense is exceedingly narrow, constrained primarily by the explicit exclusion of higher-level management from the definition of eligible “direct supervision”.2 Successful compliance requires acknowledging that the default IRS stance is to treat C-suite compensation as non-qualified General and Administrative overhead.
To successfully defend executive QRE claims, taxpayers must adopt a dual strategy: first, strictly adhering to the regulatory limits of IRC Section 41 by only claiming time demonstrably spent on resolving technical uncertainties; and second, enforcing systematic, contemporaneous, and highly granular documentation practices. The reliance on advanced compliance technology, such as Swanson Reed’s TaxTrex and CreditARMOR, is essential to operationalize this strategy. These tools facilitate the creation of the objective, verifiable records necessary to systematically segregate qualified minutes from non-qualified activities. Ultimately, the successful defense of executive QREs is not merely a matter of accurate calculation, but a function of proactive, systematic compliance enforced through specialized technology, thereby overcoming the IRS’s presumption of ineligibility.
