The research tax credit provides a significant incentive to engage in research activities. The credit has also generated quite a bit of controversy between the IRS and taxpayers.
The credit is not limited to taxpayers in the hi-tech or science industries. Taxpayers in just about any industry may qualify. This includes manufactures, consultants (such as engineers or architects), or companies with in-house computer staff.
The calculation for the credit is complicated. Wages, contract costs, supply costs, and certain computer rental costs can be included as qualified research expenses or QREs. The taxpayers gross receipts are also factored into the computation. The formula then compares these amounts for the current tax year to those for base years.
Generally, activities to design a product or process can qualify. Congress has added a number of requirements and limitations to try to clarify which design work qualifies. These requirements and limitations are frequently disputed by the IRS and the rules are constantly changing. The recent court cases are evidence of this. Here are a few examples:
An experienced tax attorney can help. We advise clients as to research tax credit and refunds, audits, and appeals.
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