How to Calculate the Base Year for R&D Tax Credits
R&D or "research and development" has been acknowledged as an integral part of business and industry since 1981 by the IRS (Internal Revenue Service). The rules are somewhat confusing for accountants to determine who qualifies. There are four rules for qualifying for the R&D credit: the activity must result in a new process, be meant to reduce risk of the activity, be of a technical nature and require experimentation or hypotheses for testing. The challenge is in determining the base (first) year to start the tax credit.
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Instructions
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1
Determine whether the expenses fall under the R&D credit definition. This should be done by a qualified group of tax or accounting experts.
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Gather data. You will need all W-2 wages for employees working on research and development activities. If an employee spends more than 80 percent of his time working on R&D activities, 100 percent of his wages should be counted for the R&D credit.
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Review the base-year formula. The base year is 12 months (consecutive) from the start of production.
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Define the variables. Let's work through an example for clarity. XYZ Corporation began doing business on January 1, 2005. XYZ began producing zeolite in Arizona on September 1, 2005. It produced 3,000 tons of zeolite during the next 12 months.
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Calculate the base year. In our example, September 1, 2005, is the date of production. For XYZ, the base year is September 1, 2005 to August 31, 2005. Base-year production is 3,000 tons.
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