What Is The Research Credit? And What’s Changed About It…

August 08, 2017 : Mike Slack

The Research Credit is an income tax credit that was designed to encourage businesses to invest more in research and development.

Rules

Generally, the credit is equal to 20% of qualified spending that exceeds a certain base amount based on the business’ revenue history, and cannot exceed 10% of the business’ total spending in the current year on qualified research. The credit is claimed on IRS Form 6765.

What Are Qualifying Research Credits?

In-house and contract research expenses spent for the purpose of discovering information that is technological in nature as part of carrying on a trade or business qualifies for this credit. To satisfy this requirement, the process of experimentation used to discover information must fundamentally rely on principles of the physical or biological sciences, engineering, or computer science. On the other hand, research conducted outside of the U.S., research in the social sciences, arts, or humanities, and research to the extent funded by any grant, contract, or otherwise by another person does not qualify.

The research credit had originally been scheduled to lapse in 2015, but the Protecting Americans from Tax Hikes Act (PATH Act) made the popular credit permanent. The Act also made two small business friendly changes to the credit.

New Changes to the Research Tax Credit

Moving forward, certain small businesses ($50 million or less in gross receipts) can claim the credit directly against any alternative minimum tax (AMT) they are liable for.

Certain qualifying small business may now elect to claim a portion of the credit as a payroll tax credit directly against their employer FICA (social security and Medicare tax) liability, rather than against their income tax. To qualify for this treatment the business’ revenue for the year must be less than $5 million and must not have had revenue for more than the past five years.

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Mike Slack

Mike Slack

The Tax Institute, H&R Block

Mike Slack, JD, EA, is a senior tax research analyst at The Tax Institute. Mike leads research teams focused on business and investment tax issues.