There have been some major changes in the Research Tax Credit that might make something worth considering as it relates to your 2016 returns.
- It became a permanent credit. It has been around since 1981 and has been one of the extenders each year since. So it is about time.
- The credit is good against AMT starting in 2016 which expands its utilization significantly. This is one of the reasons most companies with qualified research did not calculate or use the credit in the past.
- Starting in 2016, the credit can be used for the company’s portion for the federal payroll taxes. Startup companies that were in a loss position for income taxes can now benefit with a reduction in their 2017 payroll taxes utilizing the 2016 R & D credit.
- The law also expanded the type of companies that can use the credit. At this point almost any industry can use the credit including agriculture.
Now that the credit can be used against both regular and AMT tax, it has become a lot more exciting. If you get and use a tax credit, it reduces your taxes by the amount of the credit. If you get a deduction, it reduces you taxes by your tax rate. If you get a $1,000 tax credit it reduces your taxes by $1,000. If you get a $1,000 deduction and you are in the 25% tax bracket, it reduces your tax by $250.
The credit is for “qualified research expenses” paid or incurred by the taxpayer during the taxable year in carrying on any trade or business. This could include a new product or process, computer software, formula, technique or invention. The activity that qualifies for the credit must improve or have the potential of improving an aspect of the business.
There is a four-part test.
- Permitted Purpose – Relates to a new or improved business component’s:
- a. New or Improved Function or
- b. Performance or
- c. Reliability or
- d. Quality
- Technical Uncertainty – Identification of uncertainty at start of project related to one of the following:
- a. Production Method
- b. Design
- c. Capability
- d. Application
- Process of Experimentation- Includes evaluation of alternatives:
- a. Testing
- b. Modeling
- c. Refining
- d. Confirmation or Discarding
- Technological in Nature – Relies on the hard sciences including:
- a. Physical Sciences
- b. Biological Sciences
- c. Engineering
- d. Computer Science
The credit is for research in technology not for social or marketing research. Research that does not qualify for the credits:
- Related to style, taste, cosmetic or seasonal factors
- Relies on social science, arts or humanities
- Research conducted after beginning of production
- Duplication of existing business component (in whole or in part)
- Any Foreign research conducted outside the USA or any of its possessions
- Market research, management surveys, etc. (including advertising or promotions)
- Routine or ordinary testing or inspection for quality control
There are several methods of calculating the credit depending on the age of the company, its research history, etc. The credit is computed on the research related expenders for wages, supplies and any outside contracts. The company has to be at risk for the research and own the research or application at the end. Each company and situation is different but for a ball park number the credit generally is around 6% to 7% of the qualified expenditures but could be as high as 20%.
For more information, please contact your local Carlson Highland location. www.carsonhighlandcpa.com.