Monday, September 21, 2009

Research and Development Tax Credit FAQ

This is a quick recap of the research and development tax credit as it is currently available from the federal government. Calculation of this tax credit is a service that we provide to our clients.

What is the purpose of the R&D credit? To stimulate economic development by giving tax breaks to companies that invest into improving their processes and creating designing technology that is “new to the company.”

Who can get it? Just about everyone! There is a slight bias to manufacturers and software developers as it is often easier to pass the Four Part Test to prove eligibility. However, as long as you can prove that you have a legitimate R&D process in your company that you invested significant capital and manpower into, you stand to benefit.

Isn’t it set to expire? Yes, the R&D tax credit has not yet been set in stone. However, it has already been extended for 2009 by the Bush administration. There are several pieces of legislation in the works that will make the R&D tax credit permanent if passed.

So, how much? There are several methods. Currently, the Alternative Simplified Credit (ASC) is the easiest to calculate and will usually yield the biggest benefit to newer businesses; however the Traditional method is still very strong for businesses with solid base rate foundations. In all cases, in order to receive a credit, your company has to steadily increase R&D investments from year to year.

What if I have a loss? It is a true tax credit; if you have a loss, then you are not paying any taxes and thus cannot use the credit. You can carry the credit forward for up to twenty years. It is very common for start-up companies to have losses for several years and then offset the majority of their first income year with R&D tax credits accumulated during prior periods.

What if I didn’t claim a credit in prior periods? You can refile prior year returns with a completed Form 6765 in order to claim the credit. You can refile the preceding 3 returns if you do it before April 15, at which point you lose the ability to refile the oldest outstanding year. As of the current date, 2006, 2007 and 2008 can be re-filed but not 2005.

I am a start-up, with 0-2 years of activity, can I still get a credit? Yes, you are still eligible for a further simplified version of the Alternative Simplified Credit.

We can evaluate your situation and weigh the pros and cons of the Traditional method versus the newer Alternative Incremental Research Credit (AIRC) and ASC . Please let us know if you have any further questions or would like to discuss an engagement.

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