The R&D Tax Credit consists of Qualified Research Expenditures (QREs) from wages, supplies, and contract research (65%).
The R&D Tax Credit offers computation under different methods to yield the maximum credit amount for your company, including Regular Credit Method, Alternative Simplified Method (ASC), and the Alternative Incremental Research Credit (AIRC).
The Tax Relief and Health Care Act of 2006 enacted a third method of computing the credit. For tax years ending after 2006, a taxpayer can elect the alternative simplified credit (ASC). The ASC base amount computation is equal to the average qualified research expenditures (QREs) for the three tax years preceding the tax year for which the credit is being determined.
The regular credit method base amount computation uses prior year gross receipts. The fixed base percentage is multiplied by the average of the prior four year gross receipts. In the instance of a company with growing gross receipts and steady QREs, the credit computed could be minimal to non-existent.
The ASC gives companies that are base year sensitive under the regular credit method a chance to cash in on their research and development expenses.
While the Alternative Incremental Research Credit (AIRC) has been available as an option for computing the R&D Tax Credit, the Emergency Economic Stabilization Act 2008 eliminates the AIRC method for taxable years starting in 2009.
The Emergency Economic Stabilization Act also increased the ASC from 12% to 14% for tax years ending after December 31, 2008.
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