the r&d tax credit
DESCRIPTION
The R&D Tax Credit. CALED Annual Conference. April 28 th , 2011. Agenda. Overview Benefits Qualifying industries Qualified Research Activities (QRA’s) Qualified Research Expenditures (QRE’s) The Four-Part Test Excluded activities Credit calculation Additional considerations - PowerPoint PPT PresentationTRANSCRIPT
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The R&D Tax Credit
April 28th, 2011
CALED Annual Conference
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Agenda
• Overview• Benefits• Qualifying industries• Qualified Research Activities (QRA’s)• Qualified Research Expenditures (QRE’s)• The Four-Part Test• Excluded activities• Credit calculation• Additional considerations• R&D Tax Credit methodology
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R&D Tax Credit Overview
• Introduced in 1981• CA conformity• 2004 Regulations
o Elimination of “Discovery Test”o Relaxed documentation requirements
• Federal and CA non-refundable tax credit• Federal credit renewed through 12/31/11• CA credit is permanent
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Benefits
• Federal carryforward 20 years• CA credits do not expire• Statute of limitations (3 – Fed and 4 – CA)• Federal credit = 20% (gross)• CA credit = 15% (gross)• Fed + CA ~ 13% (net)
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Qualifying Industries
• Manufacturing• Tool & Die• Job Shops• Chemical Companies• Software Development• Apparel
• Wineries / Dairies• Food Processing• Waste Management• Architectural Firms• Engineering Firms• Agribusiness
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Qualified Research Activities (QRAs)
• New or innovative products• Process improvements• Design and engineering staff• Prototype development• Enhancement of existing products• Patent development• Qualification testing• PhD research
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Qualified Research Expenditures (QREs)
• Wageso Wages subject to withholding or SE taxo “One above, one below” ruleo 80% rule
• Supplieso Consumed in R&D processo Prototypes
• Contract Researcho Fees paid to outside contractorso 65% rule
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4-Part Test
• New or improved business component• Technological in nature• Elimination of uncertainty• Process of experimentation
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New or Improved Business Component
Business Component R&D MatrixThe Project’s Business Components
The Purpose of the R&D Activities Related to Development of New or Improved:
Function Performance Reliability Quality DurabilityProduct Process Computer Software
Technique Formula Invention
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Technological in Nature
• Apply principles of hard sciences (biology, chemistry, physics, computer science, engineering, etc.)• Soft sciences (accounting, marketing, legal, etc.) do not qualify
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Elimination of Uncertainty
• R&D activities must be intended to discover information new to the company• Uncertainty can be capability (“Can we do it?”) or design (“How can we do it?”)
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Process of Experimentation
• Must evaluate one or more hypothesis• Must be designed to achieve a result that was uncertain at the outset• Testing of alternatives through modeling, simulations, trials and test runs• Taxpayer does not need to succeed
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Excluded Activities• Research after commercial production• Adaptation of existing business components• Surveys and studies• Foreign research• Funded research• Internal-use software (IUS) and the “High Threshold of Innovation Test” (HIT)
o The innovation testo The economic risk testo The commercial availability test
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Credit Calculation
• Regular Research Credit (RRC) • Alternative Incremental Research Credit (AIRC)
o Fed: Repealed for years ending 1/1/09 and latero CA: Calculated as a % of QRE’s in excess of fixed base
• Alternative Simplified Credit (ASC)o Available beginning 1/1/07 – CA does not conformo May be attractive option for companies “base limited”o Claiming ASC is an election on a timely filed federal returno 12% in 2007-2008 and 14% in 2009
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Additional Considerations
• Tier 1 status• Cohan rule and documentation• AMT• § 280C(c)(3)(A) election• Controlled groups• Small Business Jobs Act of 2010 (H.R. 5297)
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R&D Tax Credit Methodology• Phase I – Feasibility Analysis• Phase II – Implementation
o Qualify projectso Quantify costso Document activitieso Perform calculation
• Phase III – Deliveryo Reporto Amend tax returns
• Phase IV – Audit Support