Tax Guide |
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A small number of tax credits remain for investments that are not necessarily targeted towards the disadvantaged or the environment. In some cases, investments that take advantage of one of these credits can become, in effect, a tax shelter for cash-rich small businesses. In other cases, certain investments to improve the employee benefits offered by your business are rewarded with a tax credit, in addition to the increased ability to attract and retain your employees. Consult your tax adviser for more details.
Research and Experimentation (R&E) Credit
The research and experimentation (R&E) credit encourages businesses to increase the amounts they spend on scientific research. The credit applies to qualified research expenses paid or incurred before December 31, 2014.
When it was first enacted in 1981, the research credit was set to terminate after four and a half years. Although it has been extended several times over the years, it was allowed to expire at one point without a retroactive extension back to the prior termination date. The latest extension was in 2012, for a period of two years. Manufacturing associations continue to lobby to make the credit permanent. In making long-term plans for research projects, they would like to be certain that the tax incentive will continue to be available
The research credit was provided to encourage taxpayers to increase their research expenditures and is the sum of the following three components:
Research funded by a person other than the taxpayer is not eligible for the credit, and the credit may not be claimed for expenses paid or incurred after December 31, 2014. However, credits from previous years may be carried forward.
Alternative simplified credit. Taxpayers may elect an alternative method to calculate the research credit amount using an alternative simplified credit. Under the alternative simplified credit method, a taxpayer can claim an amount equal to 14 percent of the amount by which the qualified research expenses exceed 50 percent of the average qualified research expenses for the three preceding tax years. If the taxpayer has no qualified research expenses for any of the preceding three years, then the credit is equal to six percent of the qualified research expenses for the current tax year. If the taxpayer makes the election to use the alternative simplified credit method, the election is effective for succeeding tax years unless revoked with the consent of the IRS.
Orphan drug credit. Taxpayers are allowed expenses for clinical testing of certain drugs for rare diseases and conditions when claiming the orphan drug credit. The orphan drug credit is linked to the research credit because the qualified clinical testing expenses are generally determined by reference to the qualified research expenses for which the research credit is allowed, subject to certain modifications. Under the 2014 Tax Prevention Act, for purposes of the orphan drug credit, the research credit is deemed to remain in effect after its expiration date of December 31, 2014.
The R&E credit is claimed on Form 6765, Credit for Increasing Research Activities.
Rehabilitation Credit
This tax credit is designed to encourage the rehabilitation of older real estate or certified historic buildings. It allows you to take a tax credit for the expenses you have for renovating, restoring, or rehabilitating (but not enlarging or adding new construction to) certain structures. The percentage of expenses you can take as a credit is 10 percent of qualified rehabilitation expenditures for buildings originally placed in service before 1936, and 20 percent for for certified historic structures.
If a project involves both rehabilitation and enlargement, only the costs of rehabilitation are eligible for the credit.
If you claim this credit, you must reduce the depreciable tax basis of the property by the amount of the credit.
The rehabilitation credit is part of the investment tax credit, and can be recaptured (paid back to the IRS) if the qualifying property is sold or disposed of within five years of the time it's placed in service. The credit is claimed on Form 3468, Investment Tax Credit.
Retirement Plan Start-Up Credit
In order to stimulate greater retirement saving, small employers who establish new retirement plans are now entitled to a tax credit for doing so. The credit is only available to employers with 100 employees or less who have not maintained a qualified retirement plan during the three-year period immediately before the first effective year of the new plan.
The credit amounts to 50 percent of the costs incurred in creating or maintaining a new qualified plan, up to a maximum of $500 in each of the first three years the plan is effective. Essentially, this means that you have to spend at least $1,000 per year to get the full credit. Any set-up and administration costs not offset by the tax credit (i.e. those above $1,000 in the first three years and those incurred after the first three years) are deductible as ordinary and necessary business expenses.
Employer-Provided Child Care Credit
Small, as well as middle-sized, businesses will be eligible for a tax credit of 25 percent of the qualified child care expenses they provide and 10 percent of the cost of qualified child care resource and referral services they offer. The employer-provided credit is capped at $150,000 per tax year.
Expenses eligible for the credit include payments under a contract with a qualified child care facility to provide child care services to the business's employees. Qualified childcare expenses also include the amounts paid or incurred by the employer to acquire, construct, establish, and operate a qualified child care facility for employees. The facility itself must meet any state and local government laws and regulations, like licensing requirements, that may apply for its location.
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