The Return of the Research and Development Credit (article)

The Return of the Research and Development Credit (article)

The passage of the American Taxpayer Relief Act of 2012 ("the Act") not only helped avert the fiscal cliff but also helped companies looking to grow. The Act reinstated and extended the research and development (R&D) credit, allowing for the credit to be generated retroactively for expenses incurred in 2012 as well as for expenses that will occur in the current 2013 calendar year. This incentive, which is one of the few tax items that has bi-partisan support, is recognized as a significant, but under-utilized, tax benefit. The credit rewards a variety of different types of efforts undertaken by a company including activities that would be performed as a necessary part of the business, such as developing or improving manufacturing processes related to new products or experimentation efforts related to improving the quality and efficiency of an existing process.

One of the primary stipulations of the credit, however, is that the expenses that may be included are only those expenses that were related to the work performed in the U.S. The legislative expectation is that not only will companies be aided in developing and improving their products and processes, but will do so by hiring more people in the U.S. to perform that work rather than outsource the work to foreign countries.

Furthermore, by allowing development activities in a myriad of industries and business types to qualify, including activities being performed by job/machine shops, food manufacturers and work performed by government contractors, a significant number of small and mid-sized companies are able to take advantage of the credit. This credit has wide applicability, as discussed above. It also has a number of provisions related to properly determining qualifying activities and the related costs.

In 2006, the IRS Large Business and International Division (LB&I) initiated a "tiered issue process." Among the issues most scrutinized were R&D credits, which were designated as a Tier I issue. This often led to long and onerous examinations, a large backlog of appeals and many R&D credit claims being disallowed. As of August 17, 2012, the IRS announced (LB&I-4-0812-010) that it will no longer use its "tiered issue process" to manage audit issues. In its place, they have created specialized practice groups to serve as advisors to examining agents. The new process also provides more authority to their agents and teams to settle issues, realizing that while consistency is important, there is no “one size fits all” approach.

Even in light of these new provisions, companies should engage in careful consideration and analysis in order to properly maximize this incentive to reduce their overall tax burden. The benefits of taking advantage of this credit can have a significant impact on a company’s bottom line and proper documentation is still vital, as the IRS will continue to consider the R&D tax credit a significant issue.

If you would like to learn more about how the R&D credit applies to your business, contact Mike Silvio, Federal Incentives Practice Leader, or your local CBIZ MHM tax advisor.


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The Return of the Research and Development Credit (article)The passage of the American Taxpayer Relief Act of 2012 ("the Act") not only helped avert the fiscal cliff but also helped companies looking to grow. The Act reinstated and extended the research and development (R&D) credit, allowing for the credit to be generated retroactively for expenses incurred in 2012 as well as for expenses that will occur in the current 2013 calendar year. ...2013-01-15T19:45:00-05:00The passage of the American Taxpayer Relief Act of 2012 ("the Act") not only helped avert the fiscal cliff but also helped companies looking to grow. The Act reinstated and extended the research and development (R&D) credit, allowing for the credit to be generated retroactively for expenses incurred in 2012 as well as for expenses that will occur in the current 2013 calendar year.