Academic journal article
By Fiore, Nicholas J.
Journal of Accountancy , Vol. 193, No. 3
For the past 20 years, a research and experimentation (R&E) credit has been part of the tax law. Unfortunately, because of its complexity, many businesses (particularly smaller ones) have failed to take advantage of this credit. Recently issued proposed regulations should make it easier to qualify.
In general, businesses can claim a credit for the amount of any qualified research that exceeds a base amount.
Expenses qualifying for the R&E credit include in-house expenses for wages, salaries and supplies (but not computer hardware), computer leasing or time-sharing costs and certain contract research. The costs must be incurred on preproduction research for a new or substantially improved business component in physical, biological, engineering or computer science. Costs incurred after a product is ready for commercial sale or use do not qualify. Costs incurred to duplicate or adapt an existing product, those related to style, taste, cosmetic or seasonal design factors and those related to research conducted in the social sciences also do not qualify.
A company must meet four tests to claim the R&E credit:
* Sec. 174 test. The costs must be trade or business expenses for experimental or laboratory research. These generally include all costs incident to a product's development or improvement.
* Business component test. The discovery must be intended for developing a new or improved business component.
* Discovery test. The purpose of the research must be to discover information that is technological in nature.
A taxpayer meets this test if the intent of its research efforts is to eliminate uncertainty in the development or improvement of a business component.
* Process-of-experimentation test. …