R&D - Alternative Simplified Credit
Simplified method to compute R&D credit
Do I Qualify for the R&D - Alternative Simplified Credit?
To qualify for the research credit the business expenses must be qualified R&D expenses, record expenses and activities accurately, and file Form 6765.
2022 R&D - Alternative Simplified Credit Details
Companies with R&D expenses can elect the alternative simplified credit (ASC) instead of the regular research credit. The ASC calculation depends on a taxpayer's recent R&D spending rather than the qualified research expenses (QREs) incurred during the mid-1980s.
Gross receipts are not taken into account and unlike the regular research credit, there is no minimum base amount for the ASC.
The ASC rate is 14% of QREs that exceed 50% of the average QREs for the three preceding tax years. The ASC rate is reduced to 6% if a taxpayer does not have QREs in all of the three preceding tax years.
QREs are the sum of in-house research expenses and contract research expenses. In-house research expenses include: 1) W-2 wages (including bonuses and stock option redemptions) paid to an employee for qualified services; 2) costs of supplies used in the conduct of qualified research; and 3) any amount paid to another person for the right to use computers in the conduct of qualified research.
Wages not subject to withholding, such as fringe benefits or non-taxed income, are not QREs, even if paid for research services performed by an employee. Options granted in conjunction with qualified services are included in wages in the year they are exercised in the amount of the option spread. For self-employed individuals and owner-employees, wages include earned income (generally net earnings from self-employment as calculated for self-employment tax purposes, but modified by the Internal Revenue Code (IRC) §401(c)(2)).
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Information needed to claim the ASC is simplified and thus is likely to be more readily available. A taxpayer may still claim the ASC even if its QREs in a tax year decrease relative to the prior year, so long as the taxpayer's credit year QREs still exceed 50% of the prior three-year average QREs.
Because the base amount is continually updated based on the taxpayer's QREs in the prior three tax years, a taxpayer's current year QREs increase its base amount in future years, which reduces the amount of research credit that it earns in those years.
Assumptions When Taking the R&D - Alternative Simplified Credit
Taxpayer will elect the ASC under IRC §41(c)(4) instead of the regular credit under IRC §41(a)(1).
• R&D - Regular Credit
Requirements to Claim the R&D - Alternative Simplified Credit
To be eligible for the research credit: 1) expenses must represent R&D costs in the experimental or laboratory sense; 2) the research must be for the purpose of discovering information that is technological in nature; 3) the application of the information must be useful in the development of a new or improved business component; and 4) substantially all of the research activities must constitute elements of a process of experimentation.
Business Entities That Can Claim the R&D - Alternative Simplified Credit
• Schedule C
• S Corporation
• C Corporation
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.