Benefits
The Tax Blotter – January 28, 2022
The Tax Blotter is a round-up of recent tax news.
Jan. 24, 2022
The Tax Blotter is a round-up of recent tax news.
Is your business on the cutting edge? The tax law provides benefits, including a credit and a current deduction, for qualified research and development (R&D) costs.
Count on the credit. How much is the R&D credit? It’s significant. Generally, it equals 20% of the amount of qualified research expenses for the year above a base amount. The base amount is a percentage (not to exceed 16%) of average annual receipts for the prior four years. In no case, however, can the credit amount be less than 50% of the annual qualified research expenses. Alternatively, a business may elect to use a “simplified credit” based on 14% of the amount by which qualified expenses exceed 50% of the average for the three previous tax years.
Go high-tech. A firm must meet certain requirements to qualify for the R&D credit. Key point: The work must be technological in nature and rely on principles of physical, biological or computer science or engineering. In a new case, a firm started by a successful clothing designer followed a strict structured process for conceptualizing, designing and developing garments. It then claimed the R&D credit for its research expenses. But the Tax Court said it wasn’t a good fit because the research failed to meet the technology requirement (Max, TC Memo 2021-37, 3/29/71).
Heed new deduction rules. Previously, a firm could take a current deduction for R&D expenses that generally mirror the requirements for the credit. However, under a provision in the Tax Cuts and Jobs Act (TCJA), research expenses must be amortized over five years (15 years for research conducted outside the U.S.), beginning in 2022. But some members of the tax community are putting pressured on Congress to repeal the TCJA provision or at least postpone it. We will keep a watch on proceedings.