Who is eligible to claim?

If your company is involved in one or more of the following activities, then you have the potential to be eligible for research and development tax credits:

• Develop new technologies or applications of existing technologies, products, processes, formulas, techniques, inventions, or computer software
• Develop or apply for patents
• Develop or improve production/manufacturing processes or facilities to be more efficient safer, or more environmentally friendly
• Perform or develop new means of environmental or regulatory certification or testing
• Add new equipment through customization or the improvement of new equipment through customization
• Reduce the number of components used to manufacture products to streamline processes and improve the product

The company claiming the qualified research expenses (QRE) must be at risk on their investment in research and must retain substantial rights in the results of the research.

What expenses can be included in the claim?

 Research-related personnel expenses:

• • Wages of employees directly engaged in qualified research activities (includes personnel directly involved in, supervising or supporting)
  • If an individual spends 80% or more of their time working on qualified research, then 100% of their wages are included

 Research-related operational expenses:

• • Supplies used or consumed in process (prototypes, scrap created during experiments and test runs, etc.)
  • Capitalizable assets do not qualify

 Research-related subcontract expenses:

• The costs of contracted research are included at 65%
• Contract research performed by a qualified research group (i.e., a University or consortium) are claimed at 75%

All costs must have been incurred for research carried out in the United States. 

How is the credit calculated?

There are different ways to compute the research tax credit and the method chosen is based on the company’s history of gross receipts and incremental R&D growth.

The traditional method uses gross receipts history dating back to the 1984-1988 tax years to calculate the base for comparing the incremental qualified research expenses for the current year (limits at 6.5% of current year QRE)

• In 2007, a new calculation method was introduced called the Alternative Simplified Credit (ASC) which analysts predict will eventually displace other methods.
• The credit is 12% of the current qualified research expenses that exceed 50% of the average qualified research expenses for the 3 preceding years (limits at 7.8% of current year QRE).
• Or 6% of the current qualified research expenses that exceed 50% of the available average history of qualified research expenses.
  • The start-up method for a new company assumes a 3% rate for the first five years.
  • Taxpayers may amend returns up to three years after original filing.
  • Note that the statutory rate of R&D credits offered by the 40 states that have such a program ranges from 0.75% to 22.5% of qualified research expenses.