Extension of R&D Tax Credits Included in Tax Package

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The tax bill just passed by Congress includes an extension of the R&D tax credit for US businesses. R&D credit expert Randy Crabtree of Tri-Merit, LLC sees the extension as an economic and job creation driver.

The tax package approved by both houses of Congress on January 1st has received enormous attention for the impact it has on individual taxpayers, and the avoidance of the “fiscal cliff’ worst case scenario. Another important component of the package, but one which is receiving far less attention is the inclusion of another extension of the Research & Development (R&D) Tax Credit. The credit has long held bi-partisan support as a key driver of economic growth, but the item was held at bay until the larger individual tax rate issues were addressed.

The bill passed late on January 1, 2013 includes an extension of the R&D credit retroactively to January 1, 2012 and extends the credit through December 31, 2013. Though initially introduced in 1981, the R&D tax credit has never been made a permanent part of the tax code, but with one brief exception of less than six months, has always been extended on a temporary basis.

Randy Crabtree, a Partner at Tri-Merit, LLC, a firm that concentrates exclusively on R&D tax credit evaluations for CPA firms across the country, said the extension is an important economic driver. “The R&D credit can provide substantial bottom line savings to a wide range of American businesses and has a direct correlation to job creation,” Crabtree said. He cited examples in recent months of companies scaling back expansion or hiring plans due to uncertainty over the availability of the credit. “American businesses now have assurance that the credit will be available through 2013 with complete certainty which should allow them to further invest in new products and processes.”

Andrew Lane, a Partner at Tri-Merit noted that the range of businesses eligible for the credit go well beyond what most consider to be research type companies. “Manufacturing accounts for over 70% of credits claimed, but software developers, aerospace firms, engineering companies, and many other industries can benefit from the credit.” Lane noted that at its most basic level of implementation, the credit should be evaluated by specific project, not by company type, and must meet a four-part criteria to be eligible. “The project must be intended to be useful in the development of a new or improved business component such as a product, process, technique, formula, invention, or software. The project should be initiated to discover information that is technical in nature, and should be intended to eliminate uncertainty related to the development or improvement of the business component. Finally, the project must evaluate one or more alternative solutions through the development, refinement, and testing of different options and technical risk must be present in the process.”

According to Crabtree, one of the primary eligible expenses is employee and contractor salaries. It is estimated 70 percent of credit dollars are used for salaries of high-skilled R&D workers. Expenses related to product testing, software development, and manufacturing processes are all examples of potentially eligible areas. “In general, a qualifying company may be eligible to deduct from its corporate income taxes an amount equal to 20 percent of qualified research expenses above a base amount,” Crabtree said. He noted that the January 1, 2013 bill included several minor changes to the law in areas involving acquisitions, but in general, the scope of the credit remained unchanged.

Support for the credit has come from both sides of the aisle in Washington with officials such as U.S. Senator Sherrod Brown (D-Ohio), Representative Peter Roskam (R-Illinois), and Representative Dave Camp (R-Michigan) speaking on behalf of extending or expanding the scope of the credit. Randy Crabtree has made several trips to Washington, DC to meet with lawmakers in recent months to urge them to make the credit a permanent part of the tax code. “If we can eliminate uncertainty about the credit I think we will see even greater investment in R&D by companies of all types. The credits can provide substantial savings for companies and allow for faster expansion of the economy and innovation by companies of all sizes.”

For more information about the R&D tax credit, and services provide by Tri-Merit, contact Randy Crabtree at 847-274-1480. Tri-Merit, based in Arlington Heights, Illinois has offices across the country and provides information at http://www.tri-merit.net. Twitter users can follow the firm @TriMerit.

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