Research Tax Credit Extended Without an AMT Limitation
On Friday, 12/17/10, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Among a myriad of tax provisions, the Federal Research and Development Tax Credit was retroactively extended yet again, through 12/31/11. This extension, coupled with the elimination of the Alternative Minimum Tax (AMT) restriction on business credits for 2010 (below), makes 2010 a very good year for US Manufacturers to claim the Research Tax Credit.
The Small Business Jobs Act of 2010
Earlier this year, President Obama signed into law the Small Business Jobs Act of 2010. What does this have to do with the R&D Tax Credit? For innovative small businesses (typically less than $50 million in revenue), the bill makes the Credit more valuable than ever before. In general, the Credit can now lower the company’s (or shareholder’s) tax bill below the AMT threshold.
In previous years, the Credit reduced tax liability down to AMT, but not below. While lucrative for many companies, most small businesses could not realize the full benefit of the Credit. This year, the AMT exemption will allow small and mid-sized US companies to reinvest what would have typically been tax dollars back into new jobs and equipment upgrades.
Estimating Your Credit
If you’ve never taken the Credit before, but want a quick way to determine if it’s worth pursuing, here’s a simple way to estimate your company’s R&D Credit value. First, you need to understand what constitutes “qualified research”.
Generally, anything you’re doing in the area of product development or process improvements should be considered. A simple test is to look at any efforts that require a design, or evolutionary process, done for the purpose of making something better – i.e. new or improved functionality, performance, reliability or quality. Keep in mind that these efforts have to rely on engineering or science, and there has to be an element of technical risk or uncertainty in the outcome.
When you look at everything the company is doing, you can generally identify engineering and/or production management employees that have the responsibility for these types of projects. To determine a rough calculation of your R&D benefit, add up the annual salaries of these key employees. However, keep in mind that others are generally involved in these projects, including direct support and supervisory personnel. In addition, supplies consumed in the development of these projects, as well as any outside contractors used to support these projects, can also qualify.
For a quick R&D Credit estimate, cut the aggregate of the key employee salaries in half, and then multiply this number by 14% – that’s roughly your annual R&D Credit value. There’s more to it than that, of course, but it gives you a good idea of how much Congress is willing to invest in your business in an effort to keep our engineering and technology jobs here in the U.S.
Is this number of interest to you? If so, you should talk to your CPA prior to filing your 2010 business tax return. Your accountant can provide you a more detailed evaluation of your benefit, and walk you through the steps necessary to claim your share of these federal incentives.
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