Research credit extended in bailout plan.

• Author: Mondoro, Anthony
• Position: TAX CREDIT

One upside of passage of The Emergency Economic Stabilization Act of 2008, was the addition of the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, or H.R. 1424. This section represents the long-awaited extension of the Section 41 research credit. On Oct. 3, Congress passed and President Bush signed the bill into law. The research credit had expired for amounts paid or incurred after December 2007.

However, H.R. 1424 retroactively extends the research credit to amounts paid or incurred after Dec. 31, 2007, and before Jan. 1, 2010, with the following changes:

* H.R. 1424 increases the credit rate under the Alternative Simplified Credit (ASC) method from 12 percent to 14 percent, but only for tax years ending after Dec. 31, 2008.

* The Alternative Incremental Research Credit (AIRC) is eliminated for tax years beginning after Dec. 31, 2008.

Implications

Given the current economic conditions, this retroactive extension potentially creates both cash benefits and earnings-per-share benefits for taxpayers. As a result of the retroactive extension of the research credit, taxpayers will need to consider the financial statement effect of the research credit now available for 2008.

Taxpayers will also need to consider the effect of the retroactive extension of the research credit on their estimated tax payments for the 2008 tax year. Fiscal-year taxpayers that have already filed their 2007 tax year returns will need to consider filing amended returns to claim research credits related to the period for which the credit had expired.

In light of the increasing scrutiny taxpayers are experiencing at IRS examination, taxpayers should consider assessing the approaches utilized and the documentation maintained to support their research credits. This retroactive extension also opens up the opportunity for taxpayers to consider a pre-filing agreement for the research credit for the 2008 tax year.

Taxpayers that are not currently reporting research credits under the ASC method will need to analyze the effect of the ASC rate increase beginning for tax years ending after Dec. 31, 2008. Fiscal-year taxpayers whose 2007 tax year has already closed are currently subject to the new 14 percent...