In this part of our series on the credit for increasing research activities (research credit), we’ll take a look at how the credit is calculated.
(For previous articles in this series:
- Click here for Part 1, discussing what constitutes qualified research.
- Click here for Part 2, discussing the type of expenses which qualify for the credit.)
Computing the Credit
The research credit equals 20% of the excess of qualified research expenses over a base amount. The base amount is the greater of the fixed-based percentage multiplied by your average annual gross receipts for the previous four years or 50% of the qualified research expenses. In general, the fixed-base percentage is computed by dividing the aggregate qualified research expenses for taxable years beginning after December 31, 1983 and before January 1, 1989 by the aggregate gross receipts for that period. For companies not in existence at such time (referred to as “start-up companies”), the fixed-based percentage is 3% for the first five years after 1993 in which you have qualified research expenses and, thereafter, is calculated based on the percentage that the aggregate qualified research expenses for certain tax years is of the aggregate gross receipts for those tax years. In no event shall the fixed-base percentage exceed 16%.
In lieu of the regular credit discussed above, you may elect to use the alternative simplified credit. The alternative simplified credit is computed as 14% of the excess of qualified research expenses over 50% of the average qualified research expenses for the previous three years. If you have no qualified research expenses in any of the previous three years, the credit shall be computed as 6% of the current year’s qualified research expenses.
In addition to the above, you may also include as part of the credit 20% of the excess of amounts paid for basic research to a qualified university, scientific research organization, or grant organization over a base amount and 20% of the amounts paid for energy research to an energy research consortium.
In taking the full credit for all of the above, you must reduce the amount taken as a deduction for qualified research expenses by the amount of the credit. Alternatively, you may elect a reduced credit amount equal to 65% of the full credit amount.
For purposes of computing the credit, corporations that are members of a controlled group of corporations or businesses under common control are treated as a single taxpayer. The credit is allocated to each member based on the member’s proportionate share of the total qualified research expenses.
[add links for additional articles in the series as they’re released]
Contact Edwards, Ellis & Associates to learn more about the research credit and how it can benefit your business.
