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 of up to 15% of incremental increases in QRE over 3 previous periods.
|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% of incremental eligible expenditure over half of the average of the previous 3 years.
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 either at federal or state-level. A medium level of technical and financial information is required in case of audit. There is added complexity due to there being both federal and state level incentives.|
|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.||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.
Franchise Tax Boards (one per state): are responsible for assessing state tax credits, covering both technical and financial eligibility.
The following are eligible costs:
|Issues to Consider|