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Research & Development Credit Very Advantageous
– September 15, 2009
What is the R&D credit?
Once a difficult credit to obtain and often not worth a business' effort, the research and development (R&D) credit is now very advantageous, especially in Louisiana. In July 2009 the possible Louisiana R&D credit amount doubled!
The research and development credit was originally introduced in Code Section 41 in 1981 to spur research spending in the US. It has been changed and extended multiple times since its introduction. This credit is for companies that spend money to create or improve their business' product, process, or function. There is both a federal and Louisiana R&D credit; the federal credit is currently extended through 2009 and can be carried back one year and carried forward twenty, and as of July 9th, 2009, the Louisiana credit is extended through 2013 and is now refundable!
Who and What Qualifies?
Many businesses do not think they are eligible for the R&D credit when in fact they are. To be eligible, a company must have expenses from research that meet each of these four criteria:
- The research is technological in nature.
- The research addresses an element of uncertainty; the outcome cannot be known.
- The research is a process of experimentation.
- The purpose of the research is to create or enhance a business component's function, performance, reliability, quality, or to significantly reduce costs.
If these four criteria are met, the business likely qualifies for the credit, though there are a few exceptions.
Not all expenditures qualify for use in the calculation of the credit. Qualified expenses include wages, supplies, and contract research expenses that are directly related to the research. Contract expenses are payments made to another company for conducting part of the research. Additionally, if a business receives the Small Business Innovation Research Grant, that business will automatically be allowed a refundable LA tax credit equal to 40% of the grant received during the year.
How Advantageous?
A business can receive up to a 20% federal R&D credit on qualifying expenses and up to a 40% state credit. There are currently two types of research credits available, the Incremental Research Credit and the Alternative Simplified Credit.
The first is the more complex of the two credits and requires that the company have research expenses and income from 1984-1988. The federal credit is equal to 20% of the qualifying research expenses, and the LA now ranges between 8% and 40% of the qualifying expenses, depending on how many LA residents the company employees. The LA percentage was just increased in July 2009 with the passage of LA Act No. 477.
The second credit, the Alternative Simplified Credit, is used for "start-up" companies that began their business or research since 1984. The federal credit percentages range between 6-14%, and the state percentage is the same as it is for the first credit, between 8%-40%.
Now that a business can receive up to a 14% federal R&D credit on qualifying expenses and up to a 40% state credit, it is not only beneficial for the U.S. to have companies developing new products and processes, but it is also advantageous for businesses to receive a large tax break.
Lauren Stinson, CPA
Tax Department
318.429.2079
lstinson@hmvcpa.com
Lauren works out of our Shreveport location in the tax department. She is experienced in the tax incentives relating to research and development and energy efficient properties.