Research Tax Credits & Other Tax Incentives
WTAS research tax credit (RTC) studies can generate significant tax benefits by providing federal and/or state tax credits to companies performing eligible research activities.
The RTC provides a non-refundable tax credit to small-, mid- and large-cap companies performing domestic research and/or development activities, which can be used to offset income tax liability.
Because the tax definition of research is broad and extends beyond entities that perform traditional research, any company developing or improving new products, existing products and/or processes can be eligible for the research credit. This can result in reduced federal (and certain state) tax liability, as well as increased cash flow. The RTC may also provide a company with both permanent tax savings and/or an effective tax rate reduction.
RTC studies can also be performed retroactively, allowing the taxpayer to claim available research credits for all open tax years. WTAS provides full IRS examination support on any RTC related issue. We also perform and/or review uncertain tax position (formerly FIN 48) measurement studies related to RTC claims completed by in-house tax departments or outsourced tax consultants.
Recently, revised legislation introduced a new credit calculation called the alternative simplified credit. Companies can now calculate their research credit under multiple methods and select the calculation that yields the best answer given their unique facts and circumstances. Currently, the federal RTC provides a net credit of up to 20 cents on each incremental dollar of qualified research expenditures (QREs) in excess of a company’s base amount. As part of an RTC study, WTAS will help determine and quantify the QREs and subsequent credit. Our audit-ready deliverable will include the credit computation, the tax and/or case law supporting the positions taken in the study, a summary of the procedures applied, cost center/project memoranda, and contemporaneous project documentation necessary to create nexus between the QREs and their projects/activities.
Additional RTC Opportunities
The following are additional areas where WTAS can serve your needs:
State Tax Credits
In addition to the federal RTC, numerous states also provide companies with tax credits for research, high technology and other related activities performed within local jurisdictions (i.e., state borders). Although most states generally follow the federal provisions, and the regulations promulgated thereunder, many states have enacted their own legislation. As a result, companies who may not be eligible for federal RTC may still be eligible for substantial state tax credits. As part of an RTC study, WTAS can determine available state credits in addition to eligible federal RTCs. In certain instances, stand-alone state RTC studies are appropriate.
Basic Research Payments
Basic research payments are any amounts paid during a taxable year by a corporation (excluding S corporations) to any “qualified organization” for the advancement of scientific knowledge not having a specific commercial objective.
Orphan Drug Credits
The orphan drug credit is designed to encourage development of drugs for rare diseases and conditions, the occurrences of which are so infrequent that drug development might otherwise be economically unfeasible. The credit is equal to 50% of the qualified expenses for the year.
Energy Research Consortium Payments
The energy credit provides companies with an ability to recover a portion of their payments made to energy research consortiums performing eligible research activities. Energy research consortiums are institutions exempt from tax and are organized and operated primarily to conduct energy research. Although energy research activities are subject to the same qualification criteria used when identifying QREs, the benefit to the taxpayer is that eligible energy research payments are not subject to the taxpayers “base amount.”