November 28, 2014

Research and Development Tax Credit: 2014 Update

By Evan Gallagher

Research and Development Tax Credit: 2014 Update Tax & Business

As more and more companies use technology to improve products and increase efficiencies, the relevance and importance of reviewing costs for eligibility for the Research and Development Tax Credit becomes more critical.

Status of Legislation:

The R&D tax credit has been temporarily extended more than 15 times since 1981, and its expiration at the end of 2013 has necessitated the need for another extension. The House of Representatives passed a bill in May that would make the credit permanent, but the bill still needs to be voted upon in the Senate. The Senators are unlikely to pass the House version of the bill, and therefore there will not be any action until the newly elected Senate convenes in 2015. It is widely assumed that, as in the past, an extension of some sort will be agreed upon and the extension would be retroactive, meaning that all of 2014 would be covered.

Proposed Changes to Legislation:

Perhaps the most important feature of the proposed House bill is the permanent extension. A permanent extension would allow businesses to plan more effectively and provide them with clarity going forward. It would also increase innovation and potentially lead to more jobs, as more businesses consider taking advantage of the credit. Another component of the House bill is the simplification of the credit, enabling further expansion of its usage.

In August, Senator Tom Carver (D-Delaware) introduced the COMPETE Act, which is a similar bill to the House proposal as it includes a permanent extension. Carver’s bill proposed increasing the credit rate to 25% of qualifying research investments, as well as expanding the credit eligibility to new industries, such as clinical research. Carver ultimately hopes to make the credit more accessible to small businesses. Criticism surrounding both versions of the bill and the proposal to make the credit permanent revolves around how to pay for the additional costs. If passed, it is estimated the bill would cost the federal government $155 billion over the next 10 years.

Alternative Simplified Credit and Amended Returns:

In June, the IRS and the Department of the Treasury finalized a regulation allowing companies to the take the Research and Development Credit using the Alternative Simplified Credit method on amended returns. Previously, only the regular R&D tax credit method could be used on amended returns, unless the alternative simplified method had been elected on the originally filed return. Since there are significant hurdles for a business to qualify for the R&D credit, many small businesses would forego it for only one year of benefit. With the new regulations, small businesses are more likely to take advantage of the credit as the benefit can be applied to multiple years using amended returns.

Startup Innovation Credit Act of 2013:

The Startup Innovation Credit was introduced in January 2013 to allow a qualified small business to use its Research and Development Credit against payroll taxes rather than income taxes. Many small businesses do not have income tax liabilities in their early years, which leads to the R&D credit being wasted. This bill ensures that the startups can use the credit to receive some form of an economic benefit, whether they have an income tax liability or not. A qualified small business is defined as an entity with less than 5 years of existence and annual gross receipts of less than $5 million. The maximum amount of the credit that can be used against payroll taxes is $250,000 per year. Currently, the bill is sitting with the Senate Finance Committee, but it is hoped the bill will resurface when the other R&D matters are considered.


There are many opportunities for businesses to take advantage of Federal and State R&D credits. We urge our clients and readers to contact their tax advisors for a review of their entities operations to determine availability. Contact Marcum’s R&D Tax Team for further consultation.

Changes in State R&D Credits:

States have continued to expand the availability and redefine the terms of their R&D credits.

Effective January 1, 2014, TEXAS enacted an R&D credit. The credit is equal to 5% of the difference between the QRE’s and 50% of the average amount of qualified research expenses incurred during the three tax periods preceding the period in which the report is based. The credit claimed may not exceed 50% of the amount of franchise tax due for the report and can be carried forward for 20 years.
Effective April 1, 2014, FLORIDA changed the way it allocates credits. Taxpayers will now receive a letter with the amount of credit the taxpayer can take, with credits allocated on a first-come, first-served basis.
Effective June 1, 2014, MARYLAND implemented annual limits for the total amount of credit that can be granted to all claimants. This limit is $4.5 million for credits certified after December 15, 2013.
NEW HAMPSHIRE implemented a $2 million limit on the aggregate tax credits issued for fiscal years dated subsequent to May 20, 2013.
Effective June 1, 2014, VIRGINIA implemented a credit cap of $6 million on the total amount of credits granted.
Effective January 1, 2014, WEST VIRGINIA terminated the Strategic and Research Development Tax Credit, but the Commercial Patent Incentives Tax Act is still active for manufacturers. The Act provides a tax credit for manufacturers developing patents in West Virginia as well as a tax credit for the commercial use of a patent in a manufacturing process or product in West Virginia.
Effective 2015 Massachusetts will allow corporations to complete R&D using alternative methods.

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