Questions Asked by Attendees from the Research and Development September 17 Webinar
Q: 2 S-Corp owners develop iPhone applications. Gross receipts = $1.5 Million salary, $100 each owner, will they possibly qualify for credit? All corporate tax is passed through to them individually and they are subject to AMT.
A: Great question. As you pointed out, if they are subject to AMT then they will not be able to utilize the credits. If they had large R&D Credits available in 2010 then they may want to consider it since 2010 R&D credit can be used to offset AMT.
Q: If the credit is carried forward (or back) doesn’t there still have to be a tax resulting from that particular research activity? Or can it be applied to tax associated with ANY research activity? Or, even better can the carryover be applied to company’s tax from other, non-research associated tax?
A: Good question – the answer is multi-part. 1. If there is only 1 company involved (regardless of formation structure), then the credit can be used by the company to offset the entire company’s income. Thus, as to your question, the credit would offset both income related to R&D activities and non-R&D activities. 2. If there are more than 1 entities involved, then the controlled-group rules kick in and each entity will claim their respective credit amount.
Q: On being able to use the current credit against other income (where there is no gross receipts from the research activity) you say that is a case by case analysis. What factors does it depend on?
A: If this is a corporation, then corporate rules apply. If a a pass-through entity, then look under 41(g) and then to the partnership rules for use of the credits to other income for any options.
Q: for base period of my new corporation (or partnership) does that include prior proprietorship? or is that ignored?
A: It depends on the facts, but generally you would include the prior year history to calculate the current year credit for new company.
Q: Looking at predecessor proprietorship – if there were no R&D expenses spent (or if they just did not claim them as credit items) do I just ignore those predecessor base type items?
A: 1. If there were no R&D expenses, then there is nothing to factor into the calculation. 2. If there were R&D expenses, then you need to ask the prior company for their R&D expense records. If none are available and they don’t provide them, then you wouldn’t have anything to factor into the new company credit calculation.
Q: Does it matter if the R&D expense is capitalized? Does one put it on the Form 6765 regardless of whether it was capitalized?
A: The question really is, does it qualify for expense treatment under section 174. If it does, then you can still look to include it in the credit calculation.
Q: Doesn’t there have to be some tax associated with the research activity? If the activity is not successful then there would not be any tax from it, so how could the credit be any good if the activity was unsuccessful?
A: In order for the company or person to benefit from the credit which they may be entitled to, then yes they would need to be in a taxable situation. If they couldn’t utilize the credit generated in the current year, then the credit would either be carried back or forward, as applicable.
Q: if the R&D is being performed by a sole proprietorship and there are no gross receipts from the activity for the year, then is it correct that any credit would not be available to offset taxpayer’s tax from other income? And if there is NEVER any gross income from the activity then does the credit carryovers just die with the activity when it is abandoned?
A: It’s best to claim the credit in the current year. Further, just because there are no gross receipts doesn’t automatically disqualify him/her. Also, it may be possible to use the credit against other income, but that is a case-by-case analysis.
Q: With Start Up Method…base period is ignored in lieu of 3% calc…correct?
A: The Start-up fixed base % is only used when using the Regular Credit Method. The Fixed Base % is fixed for the 1st 5 years at 3%. The Alternative Simplified Credit (ASC) does not use the Fixed Base % or factor in the Gross Receipts. ASC Method only uses the Qualified Research Expenses identified.
Q: When doing this calculation for start up technology ventures with lengthy development life cycles that go for years with no revenue, generally you are always limited to the 16% max fixed base % threshold (per the Form 6765 instructions)?
A: Yes, venture firms have unique situations. Special rules apply to start-up companies which try and help. On thought, instead of using the Regular Credit Method, alternatively you can always use the Alternative Simplified Credit (ASC) method which only looks at the Qualified Research Expenses for the current tax year and the prior 3 years. You should calculate it both ways (Regular Method vs. ASC Method) and can use the most beneficial calculation method each year.
Q: If a C-corp is has numerous NOLs as you point out on the slide, won’t those R&D credits be available in the future even if they pertain to NOL years? How does that work?
A: Yes, any unused R&D credits will be able to be utilized in the future once the NOLs are burned through.
Q: Why bring up the 2010 opportunity if the credit can not be used on Amended returns?
A: You can still amend the 2010 returns and claim a credit using the Regular Credit method. The issue with amended returns is – if you did not elect the ASC Method on the Original timely filed return then you must use the Regular Method.
Q: Why bring up the 2010 opportunity if the credit can not be used on Amended returns?
A: The credits can be used on amended returns.