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Is Your Company Getting the Research Credit It Deserves?

Last October’s Emergency Economic Stabilization Act (EESA) extended the federal research tax credit for the 13th time since the credit was originally enacted in 1981. It expired at the end of 2007, but EESA revived it for 2008 and 2009. If your company has claimed the research credit in the past, be sure that you claim it for all qualifying research expenditures in 2008 and 2009. If you haven’t claimed the credit in the past, now is a good time to determine if you’re eligible.

Which research qualifies?

Among other requirements, qualified research activities must be designed to discover information that’s “technological” in nature, through a process of experimentation. The research also must be useful in the development of a new or improved “business component,” which the tax code defines as “any product, process, computer software, technique, formula or invention” that your company uses in its business or holds for sale, lease or license.

Although the research credit is popular among manufacturers, it can benefit companies in a wide range of industries including construction, health care, technology, agriculture and even some service industries such as retail and finance.

How much is the credit?

Calculating the amount of the credit is complicated, and a detailed explanation is beyond the scope of this article. Depending on your company’s circumstances, the credit can be as much as 6.5% of your qualified research expenditures (QREs). QREs include wages paid to employees involved in research activities, supplies and, generally, 65% of contract research expenses.

It’s important to recognize that the research credit is incremental in nature as it is intended to encourage companies to increase their research activities. The traditional credit, for example, is 20% of the amount by which QREs in the current year exceed a base amount. Subject to certain limitations, the base amount is the greater of 50% of the QRE for the year or the taxpayer’s average gross receipts for the four preceding tax years multiplied by a “fixed base percentage.”

Why is the Alternative Simplified Credit (ASC) important?

In 2007, Congress added the ASC to the research credit. The ASC is significant because it takes gross receipts out of the equation, making the research credit available to many companies whose research spending has fallen short of threshold AGR percentages.

This might happen, for example, if a company enters a new line of business that generates significant revenue but isn’t research-intensive or the company’s research activities have become more cost-efficient.

For years ending before 2009, the ASC was equal to 12% of the amount by which current-year QREs exceed 50% of average QREs for the previous three years. (The ASC is equal to 14% of this amount for years ending in 2009.) If there were no QREs in those years, the ASC is equal to 6% of the qualified research expenses for 2008 or 7% for 2009 onward of the current year’s QREs.

Taking the next step

In today’s tough economy, the research credit can give your cash flow a welcome boost. If your company makes a significant investment in developing products, processes, techniques, software or other innovations, find out whether you’re eligible for the credit. 

Questions on the research credit? Contact Ken McCreadie at 312-980-2984.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.