They’re b-a-a-a-a-ck. No, we’re not referring to poltergeist, but rather the research credits that were previously available to business entities. The research credit had technically expired after 2011, but the American Taxpayer Relief Act (ATRA) reinstates it, retroactive to Jan. 1, 2012, and extends it through 2013.
Strategy: Ramp up your research activities. From a tax perspective, you should have no hesitation moving ahead in 2013 with the projects that will produce a credit for qualified expenses. But it’s still a crapshoot as to whether the credit will be extended again at the end of the year.
ATRA also made some changes in the credit that might affect companies acquiring other businesses.
Here’s the whole story: The research credit, which was initially introduced on a temporary basis back in the ’80s, has been extended 15 times since then. The credit is generally equal to 20% of the excess of qualified research expenses for the year over a base amount. The base amount is a fixed-base percentage (not to exceed 16%) of average annual receipts from a U.S. trade or business, net of returns and allowances, for the four years prior to the year of claiming the credit. It can’t be less than 50% of the annual qualified research expenses. Thus, the minimum credit is equal to 10% of qualified research expenses (50% x 20%).
Alternatively, a business may claim a simplified credit equal to 14% of the amount by which qualified expenses exceed 50% of the average for the three preceding tax years.
To qualify for the credit, expenses must be undertaken to discover information that is technological in nature and intended to be useful in the development of a new or improved business component.
It may include research for new products, improvement of existing products, qualification testing, patent testing and more.
Prior to the latest reinstatement of the credit, there was some confusion over the interpretation of the rules pertaining to credits claimed when one company acquired another. Under ATRA, for tax years beginning after 2011, the acquiring firm applies a statutory formula and prorates the other company’s expenses for purposes of calculating its allowable research credit, effectively based on the number of days from the acquisition to the end of the acquiring firm’s tax year. It also includes other technical changes.
Tip: Be aware that you can currently deduct qualified “research and experimentation” expenses. But taking the credit reduces the available deduction.