Certain rumors have been doing the rounds about Federal research and development tax credit. With the new proposals being made public, let's take a look at what these alterations have to offer.
Presently, two methods, namely regular credit and the alternative simplified credit (NYSE:ASC) exist for calculating credit amount for research and development.
Presently, two methods, namely regular credit and the alternative simplified credit (ASC) exist for calculating credit amount for research and development.
On the other hand, ASC is calculated by finding a base amount which should be the same as half (expressed in %) of average QREs for the last three years. 14 percent of the amount by which QREs of the present year surpass the base amount is the final ASC credit.
Proposals that Will Impact the Tax Credits for Research and Development
Expiring Provisions Improvement Reform and Efficiency act.
Developed by the Senate Finance Committee, this will
- Two years (2014 and 2015) extension of credit
- The credit can be claimed against a minimum tax which will be a blessing for pass-through entities and partnerships whose owners claim for credits on their individual earnings
- Start-ups can claim credits against their payroll taxes up to $250,000 without any income tax liability.
President's Budget - A proposal that would make the R&D credit permanent and 2015 onwards, would increase the ASC from 14 to 17 percent.
Tax Reform Act 2014
This bill would:
- Make the ASC permanent, at a higher rate of 15% generally and 10% for companies that have not incurred any QREs in the last three years.
- Amidst protests from some companies which solely depended on it, a complete elimination of regular credit is proposed.
- Reduce the credit for basic research payments and fix it at a rate of 15%
- Computer software research should not fall under the ambit of credit availing industries
- Supplies to be not included in QREs
- Reduced weightage to specific contract expenditures included in QREs
Note - A 20-percent credit is allocated for "basic research payments" to universities or other research organizations over and above the regular credit up to a certain limit.
The proposed tax policies while bringing the hammer down on certain credit-reliant industries, brings some drastic changes to how research and development is viewed in the country. With significant decisions such as these being slotted for a post midterm election time frame, that is, during or after November, R & D companies have to wait with bated breaths to see the final outcome.