Form 6765 and the R&D credit.

• Author: Beck, Allen M.
• Position: Research and development tax credit

The Sec. 42 credit was designed to encourage and reward businesses that increase their research and development (R&D) expenses in relation to their gross receipts and attempt to make technological advances in their respective industries. Form 6765, Credit for Increasing Research Activities, with its countless number of calculations, can dissuade taxpayers from trying to qualify for Sec. 41.

This item intends to assist tax advisers in developing quick methods to determine the amount of research expenses that will qualify for the credit, as well as whether the alternative incremental or the regular credit is most beneficial. Part of Form 6765 is reproduced on p. 590. (This item does not address all of Sec. 41 's Complications.)

Research Payments

One area often overlooked is whether C corporations can receive the credit for basic research payments to qualified research organizations. Generally, Form 6765, Line 7, contract research expenses, is limited to 65% of the consulting fees paid. However, if such work is performed through a university or other qualified Sec. 501(c)(3) organization and relates directly to the taxpayer's industry, the 65% limit can be avoided by including the expenses in Line 1, basic research payments paid or incurred to qualified organizations. However, Line 1 research payments are subject to special base-period limits on Line 2, qualified organization base-period amount. Research payments that do not exceed the base-period limit can be grouped into Line 7, contract research expenses, thereby qualifying for the regular research credit.

Another major caveat occurs in Sec. 41(e)(2)(A)(i), which states ".... such payment is pursuant to a written agreement between such corporation and such qualified organization...." Thus, a contract and payment amount must be established between the C corporation and research organization at the outset. It can be in the client's best interest to choose a nonprofit organization over a consulting firm, to receive the maximum tax benefit, when contracting out large research projects.

Research Expenses

When applying for the research credit, it is imperative to capture all potential research expenses. Every employee should be examined to determine the portion of his or her annual wages that can be attributed to qualified research services. Supplies and computer rentals/leases used in research projects, as well as 65% of consulting research costs, are eligible. Those expenses, when taken as a...