Research and Development Tax Credits Update
By David Reynolds
Community Bank Advisor, 2007 Winter 

Congress recently extended the Research and Development (R&D) Tax Credit through December 31, 2007. The credit, which promotes development of internal-use software, had expired on December 31, 2005. The extension of the credit passed Congress on December 9, 2006 and was signed by President Bush on December 20, 2006. The law retroactively extended the credit back to January 1, 2006 for companies that qualify. As more and more dollars are being spent on the development of internal-use software within the financial institution industry, the research credit has been very beneficial in helping to subsidize these costs. Qualifying expenses include wages for personnel involved in the development process, supplies and materials expended, and 65% of funds spent on outside-contract research and development.

In addition to the credit extension, Congress increased percentages related to the Alternative Incremental Credit (AIC) and created the Alternative Simplified Credit (ASC); these items are discussed below.

The AIC is a method for calculating the credit for companies that were in business between 1984 through 1988; however, they do not have adequate records available to substantiate the activity which took place during that period. (This information is necessary in setting the fixed-base percentage, or baseline, used in calculating the credit.). Instead of using the standard fixed-base percentage, companies are allowed to use a “stated percentage” of the qualified expenses over the average gross receipts for the four prior years in determining the credit. These “stated percentages” were increased, starting in 2007, from 2.65% (for expenses between 1% and 1.5% of average annual gross receipts), 3.2% (for expenses between 1.5% and 2% of average annual gross receipts), and 3.75% (for expenses exceeding 2% of average annual gross receipts) to 3%, 4%, and 5%, respectively.