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House Votes to Reinstate Research and Experimentation Tax Credit

On May 9, 2014, the U.S. House of Representatives voted to reinstate the Research & Experimentation Tax Credit under Section 41 of the Internal Revenue Code.  This had previously expired on December 31, 2013. It must still pass the Senate where the Senate Finance Committee backs a measure extending the credit through the end of 2015. 

What Is It?
The Research & Experimentation Tax Credit was first enacted in 1981 in hopes of developing more US-based jobs at a time when many US-based companies were moving jobs overseas.  Since then, the credit has lapsed and been revived several times. The research credit, in general, is an incremental credit that equals 20 percent of a business’ excess qualified research expenditures (QREs) for a taxable year over its base amount. The base amount multiplies the business’ fixed base percentage by its average annual gross receipts for the preceding four years.  The fixed base percentage is the percentage determined by taking aggregate QREs of the business for taxable years beginning after 12/31/83 and before 1/1/89 over aggregate gross receipts of the business for the same years.  The maximum fixed-base percentage is 16% and the base amount cannot be less than 50% of the qualified research expenses for the year.

Alternative Incremental Research Credit
As an alternative, businesses can elect to calculate the credit using the alternative incremental research credit (AIRC). That calculation is as follows:
1.    2.65% of QREs exceeding 1% of the average annual gross receipts for the preceding 4 years. This amount cannot exceed 1.5% of average annual gross receipts for the preceding 4 years.
2.    3.2% of QREs exceeding 1.5% of the average annual gross receipts for the preceding 4 years.  This amount cannot exceed 2% of the average annual gross receipts for the preceding 4 years.
3.    3.75% of QREs exceeding 2% of average annual gross receipts for the preceding 4 years.

What Is Considered “Qualified Research”?
Qualified research expenses are generally any expense undertaken to “discover information which is technological in nature and the application of which is intended to be useful in the development of a new or improved business component of the taxpayer” (See IRC section 41). In addition, substantially all the activities need to be part of a process of experimentation for purposes of the research.
Research purposes which may qualify are those that relate to a new or improved function, performance, or reliability or quality.  There are specific activities listed that are not allowed as part of the credit.  Such activities include research after commercial production has begun, surveys, studies, certain computer software, foreign research, social sciences, funded research, and adaptation or duplication of existing business components, to name a few.

How Can We Help? 
Allyn’s tax team is staffed with seasoned tax professionals experienced in all aspects of multi-state and local tax compliance and consulting for large US and global corporations.  We use that experience to your advantage.  Contact us and we can provide a customized cost-effective solution to meet your company’s needs.  For further information on Allyn Tax services, please contact: tax@allynintl.com.

 

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