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Updates to the Research & Development Tax Credit- Legislations Potential Changes

January 30, 2012

How legislation could simplify and update the research credit.

On September 19, Senate Finance Committee Chairman Max Baucus [D-MT] and Senator Orrin Hatch [R-UT] filed new legislation that would simplify and make permanent the R&D Tax Credit.

Under the current law, the R&D tax credit can be calculated by either of two methods, the “regular credit” method and the “alternative simplified credit” method, both of which provide a tax credit relating to incurred qualifying research expenses such as labor, materials and contracted costs. The more-complicated regular credit method; however, has drawn criticism from taxpayers for being outdated.

The Legislation would simplify and update the research credit significantly. It would increase the value of the alternative simplified credit from 14 percent to 20 percent of average qualifying research expenses. It would also allow the regular credit to expire at the end of 2011. The Baucus-Hatch bill would make the simplified R&D credit permanent.

R&D expenditures generally include all expenditures incident to the development or improvement of a product. R&D expenditures include the expenditures of obtaining a patent, such as attorney’s fees expended in making and perfecting a patent application. The term “product” includes any the following:

  • Formula
  • Invention
  • Patent
  • Pilot Model
  • Process
  • Technique
  • Similar Property

Expenditures Not Included
R&D expenditures do not include expenditures for any of the following:

  • Quality control testing
  • Advertising or promotions
  • Consumer surveys
  • Efficiency surveys
  • Management studies
  • Research in connection with literary, historical, or similar projects
  • The acquisition of another’s patent, model, production, or process

Please contact me any time with questions regarding R&D tax credits or check out our website for more information.

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