R&D Tax Credit Calculation Experts

R&D Tax Credit Calculation

What is the R&D tax credit? The Research and Development (R&D) tax credit was introduced in 1981 as an incentive for businesses to increase technical innovation within the United States. The R&D credit is a yearly credit that can be claimed for the current tax year and prior tax years that are still in statute. Additionally, many states also offer this R&E credit to businesses who do qualified work within their state lines, but their calculation methods may differ from the federal methods. Before a company can calculate and claim the R&D tax credit, they must understand how to claim the R&D tax credit and its research activities must first be able to pass a four-part test. The IRS determined what the R&D tax credit qualifications need to be based on a four-part test, and for research activities to qualify, they must pass each requirement. To start, the business must utilize the R&D tax credit calculation. The R&D credit calculation uses four main expenses to determine its qualified research expenditures (QREs). These expenses are wages, sub-contractors, supplies, and computer leasing costs. To determine the qualified wage amounts of qualified individuals, their wages must be multiplied by the percentage of qualified time spent on research efforts. For companies that do not actively track their time to qualified activities, McGuire Sponsel uses a R&D tax credit questionnaire to determine a person’s qualified percentage. Even though this is an estimation tool, the business must also provide information to support their percentage claims. If raw materials, supplies, and computer leasing costs are contemporaneously tracked to qualified activities, these costs can also be included in the QREs. Sub-contract work may also be included if they took part in qualified activities, but the costs associated must be multiplied by 65%. Once all the QREs have been evaluated, the R&D credit can now be calculated. To do this, a research and development tax credit form (Form 6765) is used to determine the credit amount. The business can include this into its tax returns where the credits can then be used to offset their tax liability.

How To Calculate R&D Tax Credit

Once a company’s projects are qualified, the next step is to find the amounts that can be used as R&D tax credit qualified expenses. There are four main expenses that can be used for the R&D credit calculation: wages, supplies, computer leasing, and sub-contractors. After all these expenses have been found, the next step is to calculate the amount of R&D credit for the given tax year. There are two main ways to calculate the credit. There is the start-up/standard calculation methodology, and the alternative simplified credit (ASC) calculation methodology. Each one has its own way of determining the amount of R&D credit. Each method can be used with McGuire Sponsel’s research and development tax credit template (R&D tax credit calculator 2020 used for reference). The start-up/standard calculation utilizes a base percentage, and the ASC calculation utilizes a company’s previous three years of qualified research expenses (QREs). Our team are experts in how to calculate the fixed-base percentage for the R&D credit for the start-up/standard calculation. Depending on the lifespan of a company, the fixed-base percentage will either be 3.00% for start-up companies who have five or less years of QREs, or a ratio of the QREs to gross receipts. Once the percentage has been calculated, it will then be used to help calculate the credit. McGuire Sponsel has a R&D tax credit excel spreadsheet that assists with the calculation of the credit. Now that you calculated the credit amount, how much is R&D tax credit worth? The R&D tax credit is a dollar-for-dollar incentive that could be used to offset a company’s tax liability. To do this, a company needs to add a R&D tax credit form (Form 6765) to its returns. This R&D credit form will be used for both current year returns and amended returns. If being used for amended returns, there are additional R&D tax credit documentation requirements needed to be met before the credit is accepted.

R&D Tax Credit Calculation Example

There are R&D credit limitations when finding the qualified expenses associated with determining a credit. These qualified expenses are wages, supplies, computer leasing, and sub-contractors. The only difference between these costs is that sub-contractor costs need to be reduced to 65% prior to being added to the total costs. Once all the qualified research expenditures (QREs) have been found, the next step for the R&D tax credits calculation is to determine which credit methodology will be used. If utilizing the start-up/standard methodology, there needs to be a R&D credit base amount. This is found by using a fixed base percentage of either 3.00% for start-ups, or the ratio between Total QREs and Total Sales. Once this percentage is found, the next step is to average the company’s previous four years gross receipts. This average amount will then be multiplied by the fixed base percentage which will find the base amount used in the calculation. The QREs from the year that the credit is being calculated for is reduced by the base amount. The lesser between the reduced amount or 50% of the qualified expenses is then multiplied by 20% (15.8% if electing the 280C election) to yield the final credit amount. If utilizing the alternative simplified credit (ASC), the base amount is found by averaging the company’s three prior year QREs and multiplying it by 50%. This averaged amount is then subtracted from the company’s current QREs. This new amount is then multiplied by 14% to yield the ASC tax credit. If electing the 280C election, this amount is then multiplied again at 79%. Even though this R&D credit calculation example is the standard way of determining a credit, there are multiple factors that may change the credit amount a company may receive including: short tax years, fiscal years, and the acquisition and dispositions of assets. Our team has many R&D tax credit examples they have worked with and are experts in determining the best calculation method.

Alternative Simplified Credit Method

When looking at the three main calculation methodologies that can be used to calculate the research and development (R&D) tax credit, there are certain benefits to consider when deciding on choosing the R&D regular credit vs simplified credit. Since June 3, 2014, companies have an option to elect the alternative simplified credit method (ASC) for calculating its R&D credit rather than only having standard or start-up method to choose from. The ASC method gives companies an easier way on how to calculate R&D credit. Previously, companies had to look at QREs conducted between 1984 and 1988 to find its fixed-base percentage when using the standard method. Unlike the standard and start-up methods, the simplified R&D credit calculation does not need to use gross receipts. The ASC only requires a company to look at the current QREs and the ones from the previous three years. There are some exceptions to the ASC method when calculating the credit. If a company has less than three base year QREs, the percentage is dropped from 14% to 6%. Once a company has three prior years of QREs, it can revert back to using 14% as the credit percentage. Some benefits of using the ASC includes being able to utilize the calculation for both current and amended returns, it does not require calculating a base percentage, and a lot of states offer similar methods as the federal ASC method. As time keeps moving forward, more and more companies rely on using ASC than the standard method.

R&D Tax Credit 2022

Since the research and development credit’s inception, a lot of R&D credit changes have taken place. In 2015, the R&D credit has been permanently extended. In 2018, The Tax Cuts and Jobs Act (TJCA) was signed which made the corporate tax rate decrease from 35 percent to 21 percent. Also, starting in 2022 all R&D expenditures must be capitalized and amortized over a five-year period for domestic and fifteen-year period for foreign costs. When claiming the R&D tax credit in 2021 and prior, the costs associated with R&D were considered to be expenses and were able to be deducted from the tax return. Since this has changed to being capitalized, there has been a lot of pushback from companies saying that the impact of the R&D credit has been greatly diminished when comparing to being able to expense R&D costs. A lot of discussion has been taking place on whether there needs to be a R&D tax credit reform to switch back to the original legislation prior to the TJCA signing. As of now, there have been no current R&D tax credit changes in 2022. But in late 2022, it has been said that Congress will be discussing on reverting back to the original R&D credit vs deduction. Since both parties are for this discussion, it could be the main talking point when December arrives. But until then, companies must start capitalizing their research and development expenditures and amortize it over the specified years.