The Research and Experimentation Tax Credit (hereinafter “RTC”) was added to the Internal Revenue Code (hereinafter “the Code”) in 1981 as a temporary provision of the Code at a time when research and development based jobs were significantly declining in the United States due to these jobs being moved overseas where labor rates and overall operating costs were considerably less. For this very reason, the RTC was introduced into the Code in 1981 to motivate business entity taxpayers to incur significant and qualifying research and development expenditures with the high expectations that such an advantageous tax incentive would facilitate in stimulating job growth and investment in the United States and prevent further jobs from going overseas.
Although passed into law in 1981 as a temporary provision within the Code, the RTC has successfully been extended over the past thirty two years with only one exception. For those historically familiar with the RTC, it should be duly recalled that only once from July 1, 1995 through June 30, 1996 was there a “gap” from when the RTC expired and when it was reinstated without being retroactively applied since the RTC’s inception. The RTC was most recently extended on January 2, 2013 for a two year period through The American Taxpayer Relief Act of 2012 resulting in the RTC being retroactively reinstated to cover all of calendar year 2012 and prospectively extended to cover all of calendar year 2013.
While the RTC serves as a highly valuable tax incentive for business entities conducting qualified research activities it is imperative that the RTC be methodically documented from both a qualitative and quantitative perspective to ensure a sustainable result should an Internal Revenue Service (hereinafter “the Service”) examination come to fruition. It is critical that the design, implementation and execution of the methodology for the RTC analysis be in full compliance with all applicable statutory, administrative and judicial interpretations. This article will serve as a practical guide to identifying, gathering and documenting a sustainable RTC claim.