On December 31, 2005, the federal research credit expired. After almost an entire year of failed attempts to extend the credit, Congress retroactively extended the credit from January 1, 2006 through December 31, 2007. More importantly, starting in 2007 the Alternative Incremental Research Credit amounts have been increased and there is a new Alternative Simplified Credit. There are several transitional rules and also relief for taxpayers who have filed their fiscal year returns.
The credit is retroactively extended. If a taxpayer does not use the calendar year for filing its tax returns, it may have already filed a tax return that includes part of 2006. If so, it could not take a research credit for 2006 on that return. The retroactive extension allows taxpayers to amend their previously filed returns to include the research credit if they qualify. Even better, the relief provisions allow taxpayers to make late elections to take the reduced credit or use the Alternative Incremental Research Credit. Right now the deadline for making the late election is April 15, 2007, but the IRS still needs to announce how to make the late election.
New for 2007 are increased Alternative Incremental Research Credit amounts and a new Alternative Simplified Credit that does not depend on gross receipts. The new Alternative Incremental Research Credit rates make it friendlier to taxpayers by increasing the rates and by increasing the higher rates more than the lower rates. The new Alternative Simplified Credit rewards taxpayers for investing in research, even if their research expenses are not increasing. Taxpayers may be able to claim a credit even if their investment in research is declining. Here are three examples of the new Alternative Simplified Credit.
Example 1
The taxpayer has qualified research expenses of $1 million every year.
Year - QRE Amount
2007 - $1 million
2008 - $1 million
2009 - $1 million
2010 - $1 million
The new Alternative Simplified Credit is twelve percent of the excess of the current year's QREs over 50% of the average of the three prior years' QREs.
Alternative Simplified Credit = {$1,000,000 - [($1,000,000 + $1,000,000 + $1,000,000)/3 X 50%]} X 12%= ($1,000,000 - $500,000) X 12% = $60,000
Example 2
The taxpayer has decreasing qualified research expenses.
Year - QRE Amount
2007 - $1 million
2008 - $900,000
2009 - $800,000
2010 - $700,000
The new Alternative Simplified Credit is twelve percent of the excess of the current year's QREs over 50% of the average of the three prior years' QREs.
Alternative Simplified Credit = {$700,000 - [($1,000,000 + $900,000 + $800,000)/3 X 50%]} X 12% = ($700,000 - $450,000) X 12% = $30,000
Example 3
The taxpayer does not have QREs in all three of the three prior years.
Year - QRE Amount
2007 - $0
2008 - $125,000
2009 - $250,000
2010 - $500,000
If the taxpayer does not have any QREs in one of the three prior years, the percentage defaults to six percent of the current year's QREs.
Alternative Simplified Credit = $500,000 X 6% = $30,000
To see how this affects you or your clients, please contact:
Bill Kuhlman CPA
Director of R&E Tax Credit
SourceCorp
817.732.5494 ext 132
bill.kuhlman@sourcecorptax.com
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