Tax Relief: 2006 Tax Relief & Health Care Act highlights favorable to taxpayers.

• Author: Josephs, Stuart R.
• Position: Federaltax

The following are selected highlights of the 2006 Tax Relief & Health Care Act (P.L. 109-432), signed into law Dec. 20, 2006.

RESEARCH CREDIT

This credit is extended for amounts paid or incurred after 2005 and before 2008. The new law also modifies the research credit for tax years ending after 2006 by increasing the rates of the alternative incremental credit and providing a new alternative simplified credit.

Increased Rates for Alternative Incremental Credit: A 3 percent credit rate (rather than 2.65 percent) applies to the extent that a taxpayer's current-year research expenses exceed a base amount computed by using a 1 percent fixed-base percentage (i.e., the base amount equals 1 percent of the taxpayer's average gross receipts for the four preceding tax years), but do not exceed a base amount computed by using a 1.5 percent fixed-based percentage.

A 4 percent credit rate (instead of 3.2 percent) applies to the extent that the current-year research expenses exceed a base amount computed by using a 1.5 percent fixed-base percentage, but do not exceed a base amount computed by using a 2 percent fixed-base percentage.

A 5 percent credit rate (rather than 3.75 percent) applies to the extent that the current-year research expenses exceed a base amount computed by using a 2 percent fixed-base percentage.

Special transitional rules apply to fiscal year 2006-07 taxpayers.

Alternative Simplified Credit: At a taxpayer's election, this new alternative credit equals 12 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding tax years. The rate is reduced to 6 percent if the taxpayer has no qualified research expenses in any one of these preceding years. This election applies to all succeeding tax years unless revoked with IRS consent.

The election cannot be made for any tax year for which an election to use the alternative incremental credit is in effect. However, an election of the alternative incremental credit for a tax year that includes Jan. 1, 2007 will be treated as revoked with IRS consent if the taxpayer elects the new alternative simplified credit for that year.

But elections of both the alternative incremental and simplified credits are allowed for the "specified transitional tax year," which is any tax year ending after Dec. 31, 2006 that includes such date (i.e., fiscal 2006-07 tax years). In this event, the alternative incremental credit is treated as revoked for...