Research and Development Tax Credit: Domestic & Global Incentives
As part of the Emergency Stabilization Act of 2008 (Bailout Bill) passed by Congress Oct. 6, 2008, the Research and Development Tax Credit was extended through 2009. The credit was set to expire at the end of 2007, but with this extension, companies will be eligible to claim the credit in the 2008 and 2009 tax years.
Also enacted within the R&D credit, the Alternative Simplified Credit has been increased from 12 percent to 14 percent for tax year 2008. This increase is significant because it will allow more companies to take advantage of the credit. The standard R&D credit, at a 20 percent rate, is an incremental credit calculated based on increasing research expenses over a base year. The ASC is calculated as a percent of current-year research expenditures. It is either compared to research expenditures for the prior three years or the current year alone. The good news is it is not dependent on a base year. This factor eliminates some of the recordkeeping burden, which, combined with the increased percentage for 2008, makes it attractive to more companies who had not previously taken the credit.
Qualified R&D expenditures include salaries, wages, subcontract costs, materials and supplies, or any other expense directly incurred for research activity purposes. Examples of R&D activities include expenditures related to patent development, product development, product enhancements and reformulations, testing and laboratory facilities, process improvements and lean manufacturing, experimental product supplies and materials, and administrative costs directly related to product development and improvements. Companies with expenditures in these areas should consider the potential tax savings under the R&D credit.
In addition to the U.S. R&D Tax credit, there are opportunities to obtain tax incentives for R&D activities in other countries as well. Some examples of these incentives are as follows:
The Mexican R&D Credit may be as much as 30 percent of R&D expenses incurred by the taxpayer as adjusted at the discretion of a reviewing committee. The National Science and Technology Advancement Agency administers the R&D Credit filing procedures. At the beginning of each year, a budget is allocated to fund R&D tax credits. R&D is defined as the development of new products or materials, new manufacturing processes, and improvements of functionality or characteristics of existing product, material or process in order to increase effectiveness or productivity.
In the United Kingdom, companies may be eligible for a deduction equal to 125 to 150 percent of qualifying R&D costs depending on the size of the company. Expensing of capital expenditures related to R&D also is permitted. R&D must involve a project that seeks to achieve an advance in science or technology and includes activities that directly contribute to achieving this advance through the resolution of scientific or technological uncertainty.
Canada offers a tax credit of 20 percent to 35 percent through its Scientific Research and Experimental Development program. Many provinces have additional credits. Qualified expenses must advance the understanding of scientific relations or technologies, address scientific or technological uncertainty, and incorporate a systematic investigation by qualified personnel. R&D tax incentives are offered in many other countries, including China, Australia, Japan, India and Korea. Companies that incur significant expenses in research and development activities should consider the potential savings through R&D tax credits.
If you think your company can benefit from the R&D incentives here in the U.S. or globally, please contact us.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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