Manufacturers whose activities consist of the development of new or improved business products or processes may be eligible for federal and/or state research and development credits. Internal Revenue Code Section 41 provides for two primary methods of determining a credit for increased research activities. The credits are calculated based upon the amount of current-year “qualified research expenses” relative to prior years’ qualified research expenses or average gross receipts.
Qualified research expenses (QREs) include 1) wages paid to employees performing qualified services, 2) supplies used in qualified research, and 3) 65% of contract services paid or incurred for qualified research.
The Federal research credit is equal to 20% of a taxpayer’s QREs for that tax year in excess of a calculated base amount. If the R&D credit generated in the current tax year cannot be fully utilized, the credit can be carried-back one tax year to recover taxes previously paid, or can be carried-forward 20 years to reduce future tax liabilities.
An Alternative Simplified Credit was introduced beginning with tax year 2007 that allows a taxpayer to claim a research credit equal to 14% (12% for tax years 2007 and 2008) of the amount by which current year QREs exceed 50% of the average QREs for the three preceding years. The credit is reduced to 6% if there are no QREs in any of the three preceding years. The advantage of this method is the relative simplicity of the calculation.
If your company incurred QREs in prior years, and did not claim the R&D credit on your federal tax return, amended returns can be filed for any tax year that is not statutorily closed.
Many states also offer a research and development credit against income and/or franchise taxes. The Commonwealth of Pennsylvania provides the opportunity to generate research and development tax credits. The credit is calculated based the current year QREs relative to the average QREs of the four prior years. Unused Pennsylvania R&D tax credits can be carried-forward 15 years. For those taxpayers in the early stages of development, or currently experiencing cash shortages, an application to sell Pennsylvania R&D credits can be made if the credits are not otherwise currently being used.
The State of Ohio permits an R&D tax credit against the Commercial Activity Tax (CAT) for tax years beginning after 2008. The credit equals 7% of the amount of QREs in excess of the average QREs for the three preceding years. Any unused credit can be carried forward for up to seven years.
Contact the Schneider Downs Manufacturing Group today to discuss your opportunities to claim research and development credits.
Schneider Downs provides accounting, tax and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of client. Our offices are located in Pittsburgh and Columbus.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.
