History of the R&D Tax Credit

Before 2003, you could only win the credit if you created or produced a product or process that was new to the world. This was known as the Discovery Rule. Eliminating the Discovery Rule was first proposed in 2001 because it was so restrictive. In 2003, the Discovery Rule was replaced by the requirement that instead of being new to the world, research now only had to be towards creating or producing a product or process new to the taxpayer. As a result, the barrier to qualification was lowered, and the credit became available to wider set of enterprises.

In 2006, because the Alternative Simplified Credit (ASC) was enacted, businesses could be more flexible in calculating credit amounts, and they could alter the credit’s baseline calculations.

At the end of 2015, the Protecting Americans from Tax Hikes Act (PATH Act) passed, officially making the R&D tax credit a permanent fixture of the U.S. tax code. Because the AMT (Alternative Minimum Tax) turn-off was enabled for businesses with $50 million or less in gross receipts, the pool of companies eligible to benefit from the credit greatly increased.

In 2018, the Tax Cuts and Jobs Act made R&D tax credits even more attractive by relaxing AMT restrictions for S-corps and C-corps.

On September 17, 2021, the IRS Office of the General Council released a memorandum that outlined stringent new reporting rules that went into effect January 10, 2022. To qualify for the tax credit on amended returns, taxpayers must now furnish this information:

• Identify all business components to which the research credit claim relates for that year. 
• For each business component: 
• identify all research activities performed; 
• identify all individuals who performed each research activity; 
• identify all information each individual sought to discover. 
• Use Form 6765, Credit for Increasing Research Activities, to provide the total qualified employee wage expenses, total qualified supply expenses and total qualified contract research expenses for the claim year.

In addition, under current law, firms must amortize R&D costs over five years beginning in 2022.