Extension of the Research Tax Credit
We are pleased to report that Congress finally extended the Research Tax Credit in the last minute American Tax Payer Relief Act of 2012 (HR 8, Title III, Sec 301). The credit extension is retroactive for 2012 and forward through December 31, 2013. The only modifications are minor changes in wording related to acquisitions made during the extension period. We will discuss those with clients individually, if they apply. Taxpayers now have certainty for our Research Tax Credit decisions and efforts in 2013.
However, now is an appropriate time to comment on how unsatisfactory delayed and then retroactive extensions are for corporate decision makers in the U.S. The Research Tax Credit is an incentive for companies to invest in innovation. Clearly, the lack of certainty reduces or eliminates the incentive value of tax credits for performing R&D in the U.S. We all lament the loss of jobs and the movement of R&D resources and investments overseas. In rankings of 21 developed countries that offer R&D incentives by the Organization for Economic Co-operation and Development, the United States ranks 17th for large firms and 18th for small firms. This circumstance needs to change.
The good news is that it is that corporate tax reform, which is likely to occur this year, has a high probability of including a permanent Research Tax Credit. Both major political parties are in favor of the tax credit. It certainly encourages innovation, leads to creation of new technology, increases the number of new products, helps generate new manufacturing processes, and fosters economic growth. It is well established that the Research Tax Credit returns 10 times its cost in economic value. We encourage all business taxpayers to contact their Congressional representatives to advocate the permanent Research Tax Credit by highlighting its value to your company.
Final Regulations Issued for Election of Reduced Research Credit
The IRS released final regulations effective July 27, 2011, that simplify how taxpayers may make the election to claim the reduced research credit.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853)
Certain favorable personal tax rates enacted during the George W. Bush administration were scheduled to expire on January 1, 2011. Further, certain favorable business tax provisions, some also enacted during the Bush administration, and other provisions that existed prior to the Bush administration (e.g., the Research & Development (R&D) credit) had already expired as of 2010. The President signed into law on December 17, 2010 the "The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 Act" (or the "Act") that extends these favorable personal tax provisions, also for two additional years, generally through 2011. In particular, the R&D credit — The Act reinstates for two years (through 2011) the research credit.
Permanent research credit
What is the Alternative Simplified Credit (“ASC”)?
Taxpayers can elect the ASC for qualified research expenditures (“QREs”). The ASC equals 12 percent (ASC rate for tax years 2007 & 2008. HR 1424 increased the ASC rate to 14% effective January 1, 2009 - December 31, 2011.) of the QRE for taxable years that exceed 50% of the average QRE for the three taxable years preceding the credit determination year. If the taxpayer has no QRE in any one of the three preceding tax years, the rate of the ASC equals 6 percent of the QRE for the credit determination year. Unlike the Regular Research Credit (“RRC”), the ASC does not have a minimum base amount equal to 50 percent of the credit determination year QRE.
With the introduction of the ASC, many taxpayers may benefit from the removal of the traditional “base Period” (generally the tax years between 1984-1988) and the research intensity approach (the relation of the QREs to gross receipts). This will allow ASC taxpayers to measure the credit solely on the calculation of incremental QREs. The new calculation method will be particularly important for taxpayers with:
For some taxpayers, one key benefit in calculating the ASC is the removal of gross receipts from the equation, if their facts reflect a rising revenue stream. Many manufacturing and high tech companies especially will benefit from this change if their facts reflect a limitation in the amount of Credit available to them due to a shift in the relationship of QREs to gross receipts from the base period to current years. During 1984-1988, it was common for manufacturing companies, in particular taxpayers in the government contracting industry, to spend significant amounts of money on R&D in relation to sales in those same years. AS these companies have increased research expenditures through the development of more efficient, cost effective processes over the years, the relative sales may have increased faster than the increase in research spending. As a result, the ratio of QREs to gross receipts has been decreasing, effectively limiting the amount of credit available under the Research Tax Credit.