Research and Development Credit

November 2013

Background Section 41 of Internal Revenue Code provides a tax credit

based on taxpayer’s spending on “qualified research” Qualified research – for the purpose of developing new or

improved “business component” Business component – product, process, software,

technique, formula or invention Active trade or business requirement

Research Defined Expenditures incurred to conduct research and development

in the experimental or laboratory sense undertaken to discover information that will eliminate uncertainty

Technological in nature – rely on science Process of experimentation

Excluded Activities Research after commercial production Adaptation of existing business components Reverse engineering Surveys, studies, quality control testing Foreign research

Qualified research expenses Wages for qualified services Supplies Use of computer time Contract research expenditures – at 65% Qualified research consortia expenses – at 75%

PBC Template Included in standard PBC as separate tab

Regular Credit Method Credit = 20% of the qualified research expenditures that

exceed base amount Fixed base percentage calculation Reduced credit – election See example

Alternative simplified credit Credit is 14% of the QREs for the year that exceed 50% of

average QREs for previous 3 years Reduced credit election See example