Research Tax Credit Calculation Changes
Does your company conduct research and development for new products? If so, then it may interest you to learn about recent modifications to the federal Research Tax Credit. While many are aware that the credit was extended as part of the American Taxpayer Relief Act of 2012, fewer know about the calculation modifications that were included. As part of the extension, the process for calculating credit eligibility for controlled groups and acquired companies has changed to make it less confusing and more straightforward.
Calculation Modifications & Additional Guidance
Under the extended tax credit additional guidance was issued for companies in the following situations:
- Controlled Group of Corporations – The new rule states that the amount of the credit allowed to be allocated to each member is based on each company’s proportionate share of qualifying research expenditures (QREs). Under previous rules, companies were required to calculate the credit at the group level and then allocate it to each member based on their standalone credit. The modification is based on each member’s share (under common control) of the total QREs simplifies the calculation process and eliminates confusion.
- Treatment of Acquisitions – The new rule addresses how taxpayers should treat the acquisition of a business (or major portion of operations). The modification states that when a business is acquired, the acquiring company may include only a proportionate share of the QREs for the acquisition, including only the period after the acquisition, when calculating the credit (in the year of acquisition). Adjustments to QREs and gross receipts would be prorated based on the number of days the acquired business was owned in the year of the acquisition. In the years beyond the acquisition year, the QREs and gross receipt amounts for the acquired business should be included in acquiring company’s calculations.
Under the previous rules, taxpayers may have included full year QREs for the acquired business and 100% of the QREs gross receipts in the calculations. This allowed certain QREs to be counted twice by both the disposing and acquiring companies. The new rule clarifies for both the disposing and acquiring company how to properly account for QREs when calculating the tax credit in the transitional year.
Need assistance determining how these modifications impact your situation? If so, then contact Belfint Lyons & Shuman today at 302.573.3901, or click here to email us. In a brief consultation he can assess your situation and discuss how your company can leverage the new modification when calculating the tax credit.