The R&D tax credit is a dollar-for-dollar reduction against a company's income tax liability. Because of its potentially significant benefit, it is important to know how to calculate it correctly. With the correct form, filing instructions and records, businesses are able to accurately and efficiently determine their current-year R&D tax credit.
Enter wages paid to employees who perform research and development (R&D) activities on line 5 of Internal Revenue Service Form 6765. If an employee splits time between R&D activities and non-R&D activities, only enter the percentage spent on R&D activities.
Enter the cost of supplies used for R&D activities on line 6 of Form 6765.
Enter the rental or lease cost of computers used for R&D activities on line 7 of Form 6765. Do not include the cost to run computers that you own. Only rented or leased computers are included on line 7.
Enter the applicable percentage of contract research expenses on line 8 of Form 6765. The applicable percentage is determined by whom you contracted with to do research. Note: If you paid an “eligible small business,” you are allowed to include 100 percent of the expenses. If you paid a “qualified research consortium,” you're only able to include 75 percent of the expenses. If you paid any person other than an employee, you are only allowed to include 65 percent of the expenses.
Add up lines 5 through 7 and enter on line 8 of Form 6765. These are your current year R&D qualified expenses.
Calculate the fixed-base percentage and enter on line 10. The fixed-base percentage can be calculated two different ways as described in the instructions on page 3 of Form 6765.
Enter the average annual gross receipts for the four previous tax years on line 9 of Form 6765.
Multiple line 9 by line 10 and enter on line 11 of From 6765.
Multiply line 11 by line 10 and enter on line 12 of Form 6765.
Subtract line 12 from line 9 and enter the result on line 13 of Form 6765. If 12 is greater than 9, enter zero..
Multiply line 9 by 50 percent and enter the result on line 14 of Form 6765.
Enter the smaller of line 13 or line14 on line 15 of Form 6765.
Enter the sum of lines 1, 4 and 15 on line 16 of Form 6765. Note that it's extremely rare for a company to have amounts on lines 1 and 4 of Form 6765.
Multiply line 16 by 20 percent to arrive at your current year R&D tax credit.
Note that the tax code is under constant scrutiny and is modified annually. Before filing your return or claiming any credit, it's prudent to consult with a trusted tax professional.
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