Regular Research Credit Method
The Regular Research Credit Method, also known as the traditional credit method, is the original method for calculating R&D tax credits. It involves calculating the credit based on a percentage of the qualified research expenses (QREs) of a business. Under the Regular Research Credit Method, the credit is calculated as follows:
Credit = qualified research expenses x credit percentage
The credit percentage is generally equal to 20% of QREs over a base amount. The base amount is calculated as a fixed percentage of the average QREs for the previous four years. The base amount is meant to ensure that companies that consistently engage in R&D are not penalized for doing so.
Alternative Simplified Credit Method
The Alternative Simplified Credit Method, also known as the ASC Method, is a simplified method for calculating R&D tax credits. It was introduced in 2006 as an alternative to the Regular Research Credit Method. Under the ASC Method, the credit is calculated as follows:
Credit = 14% x (QREs – 50% of average QREs for the previous three years)
The ASC Method uses a fixed percentage of 14% instead of the variable 20% credit percentage used in the Regular Research Credit Method. Additionally, instead of using a base amount to calculate the credit percentage, the ASC Method subtracts 50% of the average QREs for the previous three years from the current year’s QREs.
Generally, the ASC Method is easier to use than the Regular Research Credit Method, but it may result in a lower credit amount for businesses with consistently high QREs. However, for businesses with fluctuating QREs, the ASC Method may result in a higher credit amount.
Haynie & Company’s R&D tax credit specialists understand every business is unique. We will take your specific circumstances into consideration as we determine which method is the best fit.
What is the “Startup Provision?”
To offset the FICA portion of their annual payroll taxes, startups could qualify for up to $1.25 million (or $250,000 each year for up to five years) in federal R&D tax credit. In order to be eligible, the start-up companies must not exceed the following:
- $5 million in gross receipts for the credit year
- 5 years of gross receipts
For Help with Payroll Taxes, R&D Tax Credits, and More, Contact Haynie & Company CPA Firm in Phoenix, AZ
Research and development tax credits are a great way to encourage innovation in a wide variety of industries. Unfortunately, fewer than one-third of the companies that qualify for R&D credits actually apply for them.
As a business owner, it’s important to stay informed about your state and federal income tax liability so you don’t miss out on opportunities like these. With audit defense, income tax preparation, financial planning, and much more, Haynie & Company is the CPA firm you can trust. With decades of experience and a thorough understanding of the internal revenue code and tax liability, we help you uncover every possible tax credit year after year.
Here’s how we can assist you and your staff in applying for the R&D tax credit:
- Identifying qualifying R&D activities
- Tracking qualified expenses
- Documenting related costs
- Organizing gross receipts
- Meeting important deadlines
- Preparing any required tax filings, including how to file Form 6765
- Federal audit support/Arizona state audit support
- Performing look-back studies to find unclaimed credits for open tax years
To find out if you qualify for R&D tax credits in Arizona, contact Haynie & Company’s dedicated tax professionals today.