The costs eligible for the R&D credit are called QREs (Qualified Research Expenses) and are defined as the sum of in-house research expenses and contract research expenses. In-house research expenses generally include wages paid to employees on a qualified project, and any amounts paid or incurred as supplies used in the conduct of qualified research. Contract research expenses are 65% of any amount paid to third party for conducting qualified services on behalf of the taxpayer.

The ASC approach enacted in 2006 makes this calculation a bit easier with respect to the ‘base amount’ – rather than utilizing information from 1984-1988, a taxpayer can now elect on an originally filed return to utilize the ASC to calculate its R&D credit.

The Alternative Simplified Credit equals 14 percent of the excess of current-year QREs over 50 percent of the taxpayer’s average QREs for the prior three years. For start-up taxpayers, the credit would equal 6 percent of current-year QREs.

This ASC calculation may be greatly beneficial to companies who have gone through changes in business models or economic changes in the industry where their proportional spending on R&D relative to gross receipts/sales has not kept pace in recent years.

The ASC also permits companies to claim the R&D credit who may have had trouble documenting the historical 1984-1988 base period due to the passage of time and/or record retention issues. Contact us today to learn more about how we can assist in securing R&D Tax Credits for your company.