The R&D credit isn’t based on the total amount a business spends on QREs, but on increases in spending. To calculate the credit, a business must determine its QREs in excess of a certain “base amount.”
There are three different base period calculation methods available, based on a business’ date of incorporation, initiation of qualified research, and ability to collect required contemporaneous documentation.
The three calculation methods are:
Traditional Credit Calculation
The base amount is calculated by multiplying the taxpayer’s fixed base percentage and the average annual gross receipts for the four preceding taxable years. The fixed base percentage is the ratio of QREs to gross receipts for the 1984–1988 period. A modified rule is available for businesses not in existence during that time. The credit rate is 20% of QREs that exceed the calculated base amount
Alternative Simplified Credit Calculation (ASC)
The base amount is 50% of the average QREs for the three preceding taxable years. The credit rate is 14% of QREs that exceed the calculated base amount; rate is reduced to 6% if there are no QREs in any of the three preceding taxable years.
Start-Up Credit Calculation
The base amount is calculated by multiplying the taxpayer’s fixed base percentage and the average annual gross receipts for the four preceding taxable years. The fixed base percentage calculation is quite complex. The credit rate is 20% of Q t exceed the calculated base amount
For the traditional and start-up calculation methods, the base amount can’t be less than 50% of the current year QREs.