Research credit and the 1999 Act.

• Author: O'Connell, Frank J., Jr.
• Position: Tax Relief Extension Act of 1999

Under Sec. 41, taxpayers can receive credit for a portion of their expenditures on certain types of qualified research. Generally, qualified research includes expenditures treated as expenses under Sec. 174. In addition to limiting expenditures eligible for the Sec. 41 credit to research or experimental expenditures eligible for treatment under Sec. 174, Sec. 41(d) contains three other requirements: (1) research must be for the purpose of discovering information technological in nature; (2) substantially all of the research activities must constitute an experimentation process; and (3) the experimentation must relate to a qualified purpose. Research for "a qualified purpose" relates to a new or improved function, performance, reliability or quality.

Qualified research expenses include qualified in-house research expenses and qualified contract research expenses that a taxpayer pays or incurs in carrying on any trade or business. In-house research expenses are (1) wages paid to (or incurred by) an employee for qualified services; (2) amounts paid or incurred for supplies used in qualified research; or (3) qualified amounts paid to (or incurred by) another person for the right to use computers in qualified research. Contract research expenses equal 65% (75%, for expenses paid to a qualified research consortium) of amounts a taxpayer pays to nonemployees for qualified research.

"Basic research" is any original investigation for the advancement of scientific knowledge not having a specific commercial objective. Such expenses include amounts a corporation pays to a qualified organization for basic research, provided (1) the payment is pursuant to a written agreement between the corporation and the qualified organization; (2) the qualified organization performs the basic research; and (3) the corporation is not an S corporation, personal holding company or service organization. A qualified organization is any qualified educational institution, qualified scientific research organization, scientific tax-exempt organization or qualified grant organization.

The Sec. 41 credit (computed on Form 6765, Credit for Increasing Research Activities) is the sum of the qualified research credit and the basic research credit. The qualified research credit equals 20% of any excess of qualified research expenses for the tax year over the base amount. The basic research credit equals 20% of any excess of basic research payments over the qualified organization...