What is the Tax Credit Potential?

Companies that are more than 32 years old use one set of rules to determine their R&D expenditures that can be converted into tax credits. Newer companies are governed by different rules. The current federal credit alone can reach 6.5% of a company’s annual qualified R&D-related wages and supplies consumed, and a percentage of what is paid to contractors who provide R&D services to a company. In 2009, Congress enacted the Alternative Simplified Credit, which gives companies 14% of their increased R&D over a percentage of their average R&D for the previous three years.

An Example

Company A has $20 million in annual gross receipts, uses technology in its operations and could qualify $1 million, 5 percent, of its expenditures as R&D (this percentage varies by industry and company). Assuming a few other variables are addressed favorably, the annual credit could total $65,000. Many companies can also claim R&D tax credits in three previous tax years and amend their returns to get refunds. In this example, Company A could receive a total of $260,000 in credits for the current and three past tax years.

$20M Annual Gross Receipts

  • R&D Expenditures
  • R&D Tax Credits Claimed$260,000