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Are You Missing Out On the Research Credit?The Internal Revenue Code (Sec 41) provides a tax credit of up to 20% of qualified expenditures for businesses that develop, design or improve products, processes, techniques, formulas or software and similar activities. The credit has been available off and on since 1981 and has never been made permanent by Congress. It has been extended several times and is currently scheduled to expire at the end of 2011.
The two methods used to compute the credit are the regular method that provides for the 20% credit, or the simplified method which is easier to document but results in reduced credit amounts.
Qualified Research - The term “qualified research” means research which is undertaken for the purpose of discovering 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, and relates to:
Certain purposes that are not qualified include style, taste, cosmetic, or seasonal design factors. The definition is relatively broad and encompasses such activities as:
Qualifying Research Expenditures – Generally, expenses that qualify for the credit include in-house wages and supplies attributable to the qualified research; computer time-sharing costs; 65% of contract research expenses (paid to outside contractors in the U.S. who are conducting qualified research on the taxpayer's behalf); and supplies directly used in the conduct of the qualified research.
Note: Alternately, research and experimental expenses may be deducted or capitalized under Sec 174 on the Internal Revenue Code. However, a taxpayer must elect either to deduct or amortize (not less than 60 months) such expenses OR claim the credit for them – he or she may not do both!
Limitations - The R&D credit is also subject to limitations of the general business credit. Its total and others included in the general business credit are limited to 25% of the taxpayer’s net tax liability over $25,000. To the extent that a research credit is not available for use in the current year or immediate prior year, unused credits have a 20-year carry forward.
If you have questions related to this credit or need assistance in developing the base amounts needed to compute this credit, please give this office a call.