A credit is available at the rate of 20 percent of the excess of qualified research expenses for a taxable year over a base amount as well as for 20 percent of certain basic research payments.  Other than for basis research, only the increased level of research activities generates the credit.  The base amount is determined by multiplying the taxpayer’s fixed-base percentage by the average annual gross receipts of the taxpayer for the prior four years.  Example:

    Qualified     Research Expense       Receipts
    19X2                  250,000              2,500,000
    19X3                  200,000              2,500,000
    19X4                  250,000              2,000,000
    19X5                  300,000              3,000,000
    
    Total                1,000,000            10,000,000

    Fixed Rate Percentage = $1,000,000 divided by $10,000,000 = 10%

If the average annual gross receipts for the last four tax years is $2,500,000 the base amount is $250,000 ($2,500,000 times 10%).  If the next years qualified R&D expenditure is $350,000 the incremental credit is $20,000 (20% X {$350,000 - $250,000}).  Any unused amount may be carried back one year or forward 20 years.

In addition the taxpayer is eligible for a 20 percent research credit for basic research payments that are considered funding research for the advancement of scientific knowledge without a specific commercial objective.  To qualify, it (1) must be paid in cash under a written agreement by a regular corporation (S corporations do not qualify and (2) must be performed or controlled by a qualified outside organization (e.g. university, nonprofit scientific research organization).

Certain types of research are excluded form entitlement to the credit such as research related to style or cosmetics, beginning of commercial production, the social sciences or arts and research funded by another contractor.

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