For United States federal R&D tax credit calculations, there are two methods available to taxpayers – the regular credit (RC) calculation method and the alternative simplified credit (ASC) calculation method. Taxpayers are allowed to calculate the credit using both methods, then select whichever method provides the better result.
The value of the R&D tax credit is calculated as a percentage of current year qualified research expenses (QREs) in excess of a base amount. QREs include wages, supplies, and contract research. The differences between the methods involve credit rates applied and the different base amount calculations.
Earnd helps you determine which method to use based on your individual facts and circumstances. Going forward, we reassess which method should be selected on an annual basis to account for changes in your business to ensure the most valuable method is used.
Companies should evaluate both calculations when feasible. Start-up companies tend to use the RC calculation method, especially within the first three years of incurring QREs. Successive years of rapidly increasing QREs often lead to utilizing the ASC calculation method after year three. Established companies, especially those over 20 years in operation, typically default to using the ASC calculation method due to base period requirements for the RC.