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How the R&D Tax Credit Is Calculated

 

By DANIEL KARNIS, CPA
MARCH 2010

Editor's note: This is a Web-exclusive sidebar to "Navigating the R&D Tax Credit," in the March 2010 issue of the JofA.

 

Regular research credit. The RRC is an incremental credit that equals 20% of a taxpayer’s current-year QREs that exceed a base amount, which is determined by applying the taxpayer’s historical percentage of gross receipts spent on QREs (the fixed-base percentage) to the four most recent years’ average gross receipts. For taxpayers that had QREs in calendar years 1984 through 1988, that is the historical period for determining the fixed-base percentage (FBP). For those that had fewer than three tax years with QREs and gross receipts during that period or began having them subsequently, the fixed-base percentage starts at 3% during the first five years (beginning after 1993) and over each of the next five years successively approximates the actual percentage by an increasing fraction as shown in the table below.

 

Credit year

Base years

Percentage

15 (after 1993)

None

3%

6

4, 5

Actual % x 1/6

7

5, 6

Actual % x 1/3

8

5–7

Actual % x 1/2

9

5–8

Actual % x 2/3

10

5–9

Actual % x 5/6

After 10

Any five years from
years 5–10

Actual %

 

In any event, the fixed-base percentage may not exceed 16%, and the base amount may not be less than half of the current-year QREs.

 

RRC Illustration

Current-year QREs  $125,000
19841988 aggregate QREs  $250,000
Divided by: 19841988 aggregate gross receipts  $1,000,000
Equals: Fixed-base percentage  25%
Lesser of FBP or 16%  16%
Multiplied by: Average annual gross receipts previous four years  $700,000
Equals: Base amount  $112,000
Greater of base amount or 50% current QREs  $112,000
Excess of current QREs over minimum base amount  $13,000
Multiplied by 20% equals credit  $2,600

 

RRC Illustration for Startup (First Five Years)

Current-year QREs  $125,000
Fixed-base percentage  3%
Lesser of FBP or 16%  3%
Multiplied by: Average annual gross receipts previous four years  $700,000
Equals: Base amount  $21,000
Greater of base amount or 50% current QREs  $62,500
Excess of current QREs over minimum base amount  $62,500
Multiplied by 20% equals credit  $12,500

 

RRC Illustration for Startup (Sixth Year)

Current-year QREs  $125,000
Aggregate QREs for years 4 and 5  $100,000
Divided by: Years 4 and 5 aggregate gross receipts  $400,000
Percentage of QREs/AGRs x 1/6  4.17%
Lesser of FBP or 16%  4.17%
Multiplied by: Average annual gross receipts previous four years  $700,000
Equals: Base amount  $29,190
Greater of base amount or 50% current QREs  $62,500
Excess of current QREs over minimum base amount  $62,500
Multiplied by 20% equals credit  $12,500

 

Alternative simplified credit. Since 2007, taxpayers have been able to elect the ASC, which equals 14% (for tax years beginning on or after Jan. 1, 2009, and 12% previously) of the QREs for the taxable year that exceed 50% of the average QREs for the three taxable years preceding the credit determination year. If the taxpayer has no QREs in any one of the three preceding tax years, the ASC rate equals 6% of the QREs for the credit determination year. The election to claim the ASC must be made on the original tax return and cannot be made retroactively.

 

ASC Illustration

Current-year QREs  $125,000
Less: Average QREs previous three years $100,000 x 50%  $50,000
Difference  $75,000
Multiplied by 14% equals credit  $10,000

 

 

 

 

 

 

 

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