Investigate the Research Credit
August 9, 2011
Innovation Pays in More Than One Way
Your company might decide to put extra cash into research and development to stay on the cutting edge. Good news: Besides maintaining a competitive advantage, your business might be able to claim the Research Tax Credit.
Under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, the credit was extended through December 31, 2011.
The Research Credit was enacted in 1981 to provide U.S. taxpayers with an incentive to increase spending for domestic research. The credit has expired and been retroactively reinstated several times. Your company can claim the credit for qualified research costs paid or incurred on or before December 31, 2011.
In brief, the Research Credit applies to four basic categories of expenses:
Wages for in-house employees involved in research activities.
The cost of supplies used in research.
Payments for use of computer time in qualified research.
65 percent of the cost of contracting with an outside party to conduct research on your behalf; 75 percent for a qualified research consortium (such as a tax-exempt organization organized primarily to conduct scientific research).
Many activities qualify for the tax benefit, but as you may suspect, not all research is eligible. For example, you cannot get the credit for routine data collection; ordinary testing or inspection for quality control or research related to the adaptation of an existing business component in response to a particular customer's requirement.
Qualified expenses must be undertaken to discover information that is technological in nature and intended to be useful in the development of a new or improved business component.
The basic credit is equal to 20 percent of the qualified expenses over a base amount (generally, the average figure for the preceding four years). Alternatively, you might elect to use a three-tiered "incremental" credit approach based on reduced credit rates and fixed-base percentages. Despite guidance provided by IRS regulations, these rules remain complex and complying with them requires companies to thoroughly document the nature of their qualifying research activities. It is advisable that you consult your tax professional about research expenses.
In addition to the federal Research Credit, keep in mind that many states offer similar research tax incentives as well. The process to collect benefits is complex so consult with your tax adviser. Companies must provide certain documentation showing that their projects are not just part of the ongoing cost of doing business.