Most businesses claiming the R&D tax credit can choose between two calculation methods: the Regular Research Credit (RRC) and the Alternative Simplified Credit (ASC). The two methods use different base amounts and different percentages, and the better choice depends on your business's history of R&D spending.
The Regular Research Credit
The RRC equals 20% of current-year qualified research expenses (QREs) that exceed the business's historical base amount. The base amount is the greater of (1) a fixed-base percentage multiplied by the average of the four prior years' gross receipts or (2) 50% of current-year QREs. Computing the RRC requires gross receipts history going back to 1984, which many businesses do not have.
The Alternative Simplified Credit
The ASC equals 14% of the amount by which current-year QREs exceed 50% of the average of the prior three years' QREs. If the business has no QREs in any of the three prior years, the credit is 6% of current-year QREs. The ASC is simpler to calculate and does not require the 1984 historical data that the RRC demands.
Key Takeaways
- The Alternative Simplified Credit (14%) is usually better for growing businesses with increasing R&D spend.
- The Regular Credit (20%) may be better for companies with a long history of low R&D relative to gross receipts.
- Run both calculations before filing—the optimal choice varies by company and year.
