The Research & Development tax credit is for businesses that design, develop or improve products, processes, techniques, formulas or software. It is calculated on the increase of research expenditures. So it favors new R&D as opposed to static programs. But there is a new alternative simplified method that allows taxpayers to claim research credits if research costs remain the same or even decline when compared with prior years.
Taxpayers should carefully evaluate which of the two credit calculation methods, the Regular Research Credit (RRC method) or the Alternative Simplified Credit (ASC method), to see which provides the best results as well as determine whether the components of the calculation are readily available and can be sufficiently documented.
Under the RRC method, the credit equals 20% of qualified research expenditures (QREs) for a tax year over a base amount established by the taxpayer in 1984–1988 or by another method for companies that started up subsequently. This method may be best for companies that can document a low base amount. The ASC equals 14% (for the 2009 tax year) of QREs over 50% of the average annual QREs in the three immediately preceding tax years. If the taxpayer has no QREs in any of the three preceding tax years, the ASC may be 6% of the tax year’s QREs.
QREs include in-house wages and supplies attributable to qualified research, certain computer time-sharing costs and a percentage of contract research expenses. Generally, however, defining such expenditures has been the subject of extensive interpretation by the courts and the IRS.
The taxpayer must elect either to deduct or amortize such expenses or claim the credit for them, but may not do both. Taxpayers may reduce their deduction or amortization by the amount of expenses for which they claim a credit. They may also elect to reduce their credit in proportion to an increased deduction or amortization, but this election must be made before the filing date annually. The ASC election must be made on the original return. This is not the case for the RRC, where the taxpayer does not need to make an election on the original return.
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