Main points and requirements to claim the credit.

 

• Gross receipts for five years or less. A company isn’t eligible if it generated gross receipts prior to 2012.

• Less than $5 million in gross receipts in 2016 and for each subsequent year the credit is elected.

• Qualifying research activities and expenditures - see definitions below.

 

Key definitions

 

• What are qualifying activities?

  • Regardless of industry, if a company’s activities meet the following requirements, known as the four-part test, then they could potentially be eligible for this credit. Additional thresholds may apply if a company develops software for internal use. Also, activities must be performed in the United States and can’t be funded by another party.

1. Technical uncertainty. The activity is performed to eliminate technical uncertainty about the development or improvement of a product or process, which includes computer software, techniques, formulas, and inventions. 

2. Process of experimentation. The activities include some process of experimentation undertaken to eliminate or resolve a technical uncertainty. This process involves an evaluation of alternative solutions or approaches and is performed through modeling, simulation, systematic trial and error, or other methods. 

3. Technological in nature. The process of experimentation relies on the hard sciences, such as engineering, physics, chemistry, biology, or computer science. 

4.  Qualified purpose. The purpose of the activity must be to create a new or improved product or process (computer software included) that results in increased performance, function, reliability, or quality.

 

• What are eligible R&D costs?

1.  Wages. W-2 taxable wages for employees offering direct support and first-level supervision of research.

2.  Supplies. Supplies used in research, including so-called extraordinary utilities but not capital items or general administrative supplies.

3.  Contract research. Certain subcontractor expenses (provided the subcontractor’s tasks would qualify if they were instead being performed by an employee). These can include labor, services, or research, but payment can’t be contingent on results. In addition, the taxpayer must retain substantial rights in the results, whether exclusive or shared.

4. Rental or lease costs of computers. This could include payments made to cloud service providers (CSPs) for the cost of renting server space, as longs as payments are related to hosting software under development versus payments for hosting a stable software release.

 

Important technical points/timelines

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• The benefit will be between 6 percent and 14 percent of a company’s eligible R & D costs.

• The payroll tax offset will be available for qualified expenses incurred in 2016.

• The credit must be calculated and shown on a taxpayer’s 2016 federal income tax return, and the portion of the R&D credit that will be applied to offset payroll taxes will need to be identified and elected when that return is filed in 2017. 

• The payroll tax offset will be available on a quarterly basis beginning in the first calendar quarter that begins after a taxpayer files their federal income tax return. Taxpayers would need to file their 2016 federal income tax returns by March 30, 2017, to apply the payroll tax offset to the second quarter. The amount of the credit that is not used in a given quarter can be carried forward. 

• This credit must be specified, elected, and filed on the original 2016 tax return before you can begin to offset payroll taxes in 2017. Under the current rules, taxpayers won’t be able to take advantage of this opportunity on an amended return.

• The credit is offsetting social security taxes which are otherwise payable upon filing of the federal quarterly payroll forms 941.