The good news is that the research tax credit was extended. The disappointing news is that it is currently scheduled to expire again on December 31, 2011 unless a new law is passed to extend it again. The same rules are still in effect where the credit applies to new or improved activities using the biological or physical sciences where information is obtained through a process of risk and experimentation. However, there have been a few significant developments in this area through case law in the last few years, some of which provide additional clarity around the rules while others provide taxpayers with additional opportunities. Some of the key areas to revisit this year include:
- gross receipts on international intercompany transfers (Proctor and Gamble);
- assets of a character subject to depreciation (TG Missouri);
- research after commercial production (Union Carbide Corporation); and
- business component defined and expanded (Trinity Industries).
In addition, companies that are defined as “Small Businesses” under the Internal Revenue Code can obtain additional benefits with the relaxation of Alternative Minimum Tax (AMT) rules as it pertains to utilization of research credits. Historically, research credits were generally used to reduce the regular tax liability only up to the AMT threshold. That meant that many companies who generated significant research credits could not benefit from them immediately if they were also subject to AMT. This rule has changed substantially and now allows small businesses to utilize research credits generated in 2010 and later to offset the AMT liability. For companies with gross receipts of less than $50 million, this may be a significant benefit.
Of course, the research credit remains a significant target on the part of the IRS largely due to its subjectivity. As a result, a well thought out and executed plan of qualitative analysis combined with quantitative analysis is the best course of action if you intend to claim a research credit.
If you believe your company can benefit from this credit, please reach out to your Marcum team and we will be happy to discuss this with you.