Country Profiles

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The USA has one of the broadest definitions of what qualifies as R&D and is accessible to a far wider
category of claimant, including individuals.

The USA offers two different R&D incentive methodologies, the Alternative Simplified Credit (ASC)
Method being the primary method used. The ASC Method is an incremental and non-refundable tax
credit and equals up to 14% on the excess of current year Qualifying Expenditure (QE), over 50% of the average Qualified Research Expense (QRE) for the prior 3 years. In addition, 36 of 50 states offer a tax credit.

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Federal Level

State Level

14% benefit on incremental, eligible expenditures that are over half of the average of the previous 3 years. Depending on the state, the calculation varies, but generally between 5% and 15%.
Benefit Overview

The benefit is a non-refundable tax credit and claimants can claim a Federal tax credit up to 3 years back.

Depending on the state, some credits can be claimed up to 4 years back, while some other states only allow a current year filing.

For qualifying start-ups in first five years of operation, a tax credit can be applied against payroll taxes.

Eligible Claim Period

Fiscal year-based claim, up to 3 years back. The eligible claim period will vary by state.
Historical Background

The regime started in 1981 when the R&D Tax Credit was originally introduced in the Economic Recovery Tax Act to help counteract the recession. Since the credit’s original expiry date of 31st December 1985, the credit has expired eight times and has been extended fifteen times, retroactively. The last extension expired on 31st December 2014.

In 2015, the PATH Act made the R&D tax credit programme permanent in a measure of the government spending bill.

Ease of Application

No pre-approval is required at a federal level. Many states do require pre-approval. A relatively comprehensive and complex level of technical and financial information is required in case of audit. The Federal form includes a
financial, as well as a technical aspect. There is added complexity due to there being both federal and state level incentives.
For current year returns, the scheme only requires completing a 2-page form, providing a summary of expenditures to be claimed. IRS expects Taxpayers to have a readily available report detailing the claim building process and methodology, eligible expenditures, eligible projects and eligible activities, along with records to substantiate the claim.

For amended years, there are both project and employee activity descriptions required. Specifically:

Taxpayers filing a refund that includes a claim for the IRC § 41 research credit must provide, at a minimum, five essential pieces of information:

  1. Identify all the business components that form the factual basis of the IRC § 41 research credit claim for the claim year.
  2. All research activities performed by business component.
  3. All individuals who performed each research activity by business component.
  4. All the information each individual sought to discover by business component.
  5. The total qualified
    – employee wage expenses,
    – supply expenses, and
    – contract research expenses.
This is dependent on the state and the scheme. However, most schemes have adopted the federal methodology, and forms are short and required information is limited.
Regulating Body Policies

The Internal Revenue Service (IRS) is responsible for assessing the federal tax credit, covering both technical and financial eligibility.

State Taxing Authorities are responsible for assessing state tax credits, covering both technical and financial eligibility.

Eligible Costs

The following are eligible costs:

  • Salaries of US employees including support staff (For staff who spend more than 80% of time on qualified activities, 100% of their salary is eligible)
  • US subcontractors
  • Materials
  • Supplies
  • Basic research payments
Issues to Consider

  • While the scheme is very broad and easy to apply for, properly documenting the claim building process, as well as collecting contemporaneous technical and financial supporting evidence, are key elements in case of an audit
  • IRS audits can be aggressive, complex and long – being prepared is key.