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 a business’s qualified research expenses (QREs). Under the Regular Research Credit Method, the credit is calculated as follows:
Credit = qualified research expenses x credit percentage
The credit percentage generally equals 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.
The tax professionals at Haynie & Company 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?”
Startup companies and small businesses could qualify for up to $1.25 million (or $250,000 each year for up to five years) in federal R & D tax credit to offset the FICA portion of their annual payroll taxes. To be eligible, the company must not exceed the following:
- $5 million in gross receipts for the credit year
- 5 years of gross receipts