This month, we’re continuing our series of why it is beneficial to use an outside R&D tax consulting firm to calculate your R&D credits with an article on Base Period!
Base Period Requirements!
Adding to the complexities of calculating the R&D credit, in addition to calculating the qualified research expenses for the current tax year, you must also calculate the qualified research expenses for the “base period.” The Internal Revenue Code allows taxpayers to use one of two base methodologies when calculating the R&D credit: the Alternative Simplified Credit (ASC) and the Regular Credit. The ASC method is usually easier to calculate because it only requires data from the three prior tax years, so that is oftentimes the method used. However, in our experience, the Regular Credit methodology can increase the credit if the information required is available.
What is the Regular Credit Calculation ?
If the taxpayer elects the Regular Credit, the R&D credit amount is twenty percent of the excess of the qualified research expenses for the taxable year over the base amount. The term “base amount” means the product of the fixed base percentage and the average annual gross receipts of the taxpayer for the 4 prior tax years. However, the base amount can never be less than 50% of the qualified expenses for the credit year.
There are two types of base calculations under the “Regular Credit” methodology – “80s” and “start-up” – and the methodology required for each taxpayer is determined based on the first year of R&D for the company. If the first taxable year in which the taxpayer had both gross receipts and qualified research expenses occurred after December 31, 1983, or there are fewer than 3 taxable years beginning after December 31, 1983 and before January 1, 1989 in which the taxpayer had both gross receipts and qualified research expenses, the start-up methodology must be followed. If not, then the 80s regular base methodology must be used.
Under the start-up base methodology, the fixed base percentage calculation is determined by the number of years the company has been conducting R&D as compared to the years for which the R&D credit is calculated.
What about the Alternative Simplified Credit Calculation ? What is the difference ?
If a taxpayer elects the ASC methodology, the credit is equal to fourteen percent of so much of the qualified research expenses for the taxable year as exceeds fifty percent of the average QRE for the 3 prior taxable years. If there are no expenses in any of the 3 prior years, the credit equals six percent of the QREs of the current year.
As you can see the Regular Credit can be much more complex to calculate based on the historical information needed. Here at EPSA USA, we specialize in calculating both methods and have optimized many R&D credits through utilizing the Regular Credit base methodology. Since outside consultants are solely focused on the R&D credit, they have the expertise, resources, and time to ensure you are receiving the maximum benefit while staying within the letter of the law. As R&D Consultants, we’ve worked with countless businesses and their CPAs to calculate an R&D Tax Credit. We partner with CPAs and businesses just like yourself to provide this valuable benefit.
Reach out to us today to learn more about our process and we’ll get back to you within a few hours!