IRS Research Tax Credit Renewed Retroactively for 2008 and Also Extended
Through 2009
Federal Taxes Weekly Alert
October 31, 2008
One of the tax provisions that were enacted as part of the Emergency
Economic Stabilization Act of 2008 (Act) retroactively revives and extends
the research credit. The Act also terminates the alternative incremental
research credit (AIRC) and increases the alternative simplified research
credit. In addition, it makes a technical correction relating to how the
research credit is computed for any tax year with respect to which the
research credit applies to a number of days that is less than the total
number of days in the tax year.
General background.
A taxpayer is entitled to a research credit, which is generally equal to 20%
of the amount by which the taxpayer's qualified research expenses exceed a
specific base amount unless the taxpayer elects the alternative incremental
research credit (AIRC), or the alternative simplified credit (ASC).
Additional components of the research credit include the separately computed
"university basic research credit" equal to 20% of the basic research
payments to qualified research organizations less the "qualified
organization base period amount" and a separately computed "energy research
consortium credit" based on amounts paid or incurred to an energy research
consortium. Unlike the other components of the research credit, the energy
research consortium credit applies for all qualified expenditures, not just
those in excess of a base amount.
Under pre-Act law, the research credit, including the university basic
research credit and the energy research consortium credit, was scheduled to
expire and was not available for any otherwise qualifying research expenses
paid or incurred after Dec. 31, 2007.
Qualified clinical drug testing expenses are eligible for the orphan drug
credit. Expenses eligible for this credit are defined, with certain
modifications, by reference to the Code Sec. 41 definition of expenses
qualifying for the research credit. For this purpose, under pre-Act law,
Code Sec. 41 was considered to remain in effect for periods after Dec. 31,
2007.
Research Credit Revived and Extended
The Act revives and extends the research credit for two years by striking
the Dec. 31, 2007 expiration date of the research credit (including the
university basic research credit and the energy research consortium credit)
and replacing that date with Dec. 31, 2009. (Code Sec. 41(h)(1)(B))
RIA observation:
The extension applies to amounts paid or incurred after Dec. 31, 2007 and
before Jan. 1, 2010. The research credit won't apply to amounts paid or
incurred after Dec. 31, 2009. An earlier termination date applies to the
AIRC, as explained below.
The Act also makes a conforming change to the orphan drug credit by
providing that, for purposes of the orphan drug credit, Code Sec. 41 (the
research tax credit) is considered to remain in effect for periods after
Dec. 31, 2009. (Code Sec. 45C(b)(1)(D))
Elective Alternative Incremental Research Credit Terminated
Taxpayers are allowed to elect an alternative incremental research credit (AIRC)
in lieu of the regular research credit. If a taxpayer elects to be subject
to this alternative regime, the taxpayer is assigned to a three-tiered
fixed-base percentage (that is lower than the fixed base percentage
otherwise applicable) and the credit rate likewise is reduced.
Under the AIRC, a credit rate of:
... 3% applies to the extent that a taxpayer's current-year research
expenses exceed a base amount computed by using a fixed-base percentage of
1% but do not exceed a base amount computed by using a fixed base percentage
of 1.5%;
... 4% applies to the extent that a taxpayer's current-year research
expenses exceed a base amount computed by using a fixed-base percentage of
1.5% but do not exceed a base amount computed by using a fixed base
percentage of 2%;
... 5% applies to the extent that a taxpayer's current-year research
expenses exceed a base amount computed by using a fixed-base percentage of
2%.
Under pre-Act law, the research credit, including the AIRC, was scheduled to
expire and was not available for any otherwise qualifying research expenses
paid or incurred after Dec. 31, 2007.
AIRC terminated.
Under the Act, no election of the AIRC applies to tax years beginning after
Dec. 31, 2008. (Code Sec. 41(h)(2))
RIA observation:
Thus, even though the regular research credit has been extended to apply to
amounts paid or incurred through Dec. 31, 2009, the AIRC isn't available for
tax years beginning after Dec. 31, 2008.
RIA observation:
Termination of the AIRC is not limited to new elections. Taxpayers who had
elected the AIRC in an earlier year will no longer be able to claim the AIRC
for tax years beginning after Dec. 31, 2008. These taxpayers must therefore
decide whether to use the regular research credit under Code Sec. 41(a)(1)
or the alternative simplified method under Code Sec. 41(c)(5).
Alternative Simplified Research Credit Increased
Taxpayers may elect an alternative simplified research credit (ASC) in lieu
of the regular research credit. Under pre-Act law, the ASC was equal to 12%
of the excess of the qualified research expenses (QREs) for the tax year
over 50% of the average QREs for the three tax years preceding the tax year
for which the credit is being determined.
ASC rate increased.
The Act increases the ASC rate to 14%. However, it expressly retains the 12%
rate for tax years ending before Jan. 1, 2009. (Code Sec. 41(c)(5)(A))
RIA observation:
Thus the ASC rate is raised from 12% to 14% for tax years ending after Dec.
31, 2008.
RIA illustration (1):
X, a calendar year taxpayer, has $500,000 of QREs for its 2009 tax
year. For the preceding three tax years, X's QREs were $40,000, $50,000, and
$90,000, an average of $60,000 per year. X can elect an ASC of $65,800 (.14
× ($500,000 – $30,000, which is 50% of $60,000)).
RIA illustration (2):
Y, a calendar year taxpayer, has $500,000 of QREs for its 2008 tax
year. For the preceding three tax years, Y's QREs were $40,000, $50,000, and
$90,000, an average of $60,000 per year. X can elect an ASC of $56,400 (.12
× ($500,000 – $30,000, which is 50% of $60,000)).
Home Up Australian-Tax-Dodge-Advice High-Taxes-Drive-Rich-To-Move Little-Known-USA-Tax-Savers New-IRS-Appeal-Programs Tax-Breaks-Financial-Bailout Castroneves-Indicted-Tax-Evasion Business-Tax-Breaks-2008 Avoid-Scams-Mentioning-IRS US-Seeks-Foreign-Bank-Account-Holders Economic-Stimulus-Deadline 2008-2009-US-Research-Tax-Credit IRS-Audit-Risk Car-Mileage-Deduction-2009 National-Taxpayer-Advocate-2008-Report Natural-Disaster-Tax-Relief States-Offer-Tax-Breaks-New-Jobs Car-Purchase-Tax-Credit-2009 Business-Deductions-Disallowed First-Time-Home-Buyer-Tax-Break UBS-Client-Tax-Conviction
|