Research And Development Tax Credit

Research And Development Tax Credit
by Takara Alexis

Over the past 25 years, the Research and Development Tax Credit has been an elusive target for many businesses. Since its creation in 1981, the credit has died and been resurrected at least 11 times by Congress but never made permanent. Deciding adequate expenditures and the baseline for calculation would make the best business owner cringe. But armed with professional tax help, fighting the red tape can be a helpful endeavor for many businesses.

Private industry expenditures for research and development have increased to about two-thirds of national R&D spending, as the government's portion has declined, from 1.92% of GDP in 1964 to 0.80% of GDP in 2004, according to the Manufacturing Council. American manufacturers, who account for 14% of U.S. gross domestic product, claim about 60% of the credits.

While research and development is mainly considered the domain of large companies, smaller businesses have more to gain, as the value of the R&D credit as a percentage of their assets can be as high as 9.4 percent. Of the 16,000 businesses using the R&D credit, more than 4,500 companies have assets of less than $1 million.

The IRS defines R&D expenditures as those "incident to the development or improvement of a product," including the prices and attorney's costs associated with obtaining a patent. The IRS definition of "product" includes formulas, inventions, patent, pilot models, processes and methods. Excluded payments involve quality control testing, advertising and promotion, consumer surveys, efficiency surveys, management studies, research for literary, historical or similar projects, and the acquisition of another's patent, model, production or process.

The next hurdle is figuring out exactly how much tax credit the business has coming. Businesses must first determine their base amount of R&D expense, a calculation probably best completed by a tax professional. The business can claim 20 percent of R&D expenses over that base amount, which will vary from business to business. The work has to be done in the U.S. for U.S. research and development.

In 1996, Congress passed the Alternative Incremental Research Credit (AIRC), intended to help companies with significant R&D expenditures who did not qualify for the credit due to economic circumstances during the base period. The amount of the AIRC is usually less than the regular R&D credit.

Need help hiring a collection agency? Look no further! Rapid Recovery Solution is an attorney based national and international debt collection agency. To get on the right track with debt recovery, contact RRS today. We don't get paid unless you collect!