Everyone’s got their eyes on the prize when it comes to claiming R&D tax credits. But first things first. Before you can claim the credit, you need to calculate it. And you better believe that method selection is paramount to determining the type of benefit your company receives. Here’s a look at the two methods of calculation, and how they can positively impact your business.
The Regular Research Credit
The regular research credit (RRC) is an incremental credit designed to boost investment in experimentation and research. It’s 20% of the qualified research expenses (QRE) of the taxpayer’s current year over a base amount. How is the base amount calculated?
By taking the historical percentage of gross receipts spent on QRE’s and applying them to the last four years’ average gross receipts.
The Alternative Simplified Credit
The alternative simplified credit (ASC) became available to taxpayers for taxable years beginning in 2007. The ASC is 14 percent of the QRE’s for the taxable year that is more than 50 percent of the average QRE’s for the preceding three tax years.
Businesses can claim a six percent credit to QRE’s for the current tax year if there were no qualified investments in one or more of the preceding three years. The ASC allows companies lacking historical documentation to utilize a more recent and rolling base period to file for the credit.
How to Select the Best Method
Selecting an R&D calculation method isn’t one-size-fits all—which is a good thing. It provides companies the opportunity to compare which credit rules in their favor. So, what does it take to select the most beneficial method?
First, don’t let the ASC’s name fool you. While it’s a simpler method, it doesn’t always yield maximum benefits. ASC tends to be more favorable for high–base–amount companies, companies missing information from the base period, or companies that have gone through complex mergers or acquisitions.
As for the RRC— it’s more suitable for taxpayers that are new startups or have low base amounts.
Proper selection goes beyond picking one method over another. Companies need to be open to re-evaluating the selections annually. As circumstances and eligibility change (and you know it will), it’s important to go back to the drawing board to see if the past method still applies to your present inner–workings.
Technology Can Help
Detail is everything when it comes to claiming the credit. Turns out, the same applies to calculating it. With the help of AI-based technology, companies can keep all documentation organized and accessible for present (and future) computations.
Plus, a technological solution helps companies decide the best method based on the information available, as opposed to basing it on what’s not available. And it provides a yearly overview, which will help to select the most beneficial method in the future.
So, to determine the best method for your company, consider your situation every year. Be flexible—what worked last year may not be your best option now. And enlist technology to make the whole process easier.
Want to learn more about the two calculation methods? Listen to our podcast discussion on Fiona’s R&D Tax Podcast: Episode 7: The Alternative Simplified Credit vs The Regular R&D Tax Credit