Below, Mackles explains how to calculate your R&D credit. Don't try this at home without professional help. Because the credit expired June 30, 1995, it is available on a prorated basis for the first six months of that year. To make the math easier, we'll base our examples on 1994.
1. First, calculate average annual gross receipts for 1984-88. (For those not in business then, see step 3). Yes, it's a long time ago, and, yes, many of your accountants and employees from that time probably aren't around anymore, so getting accurate records won't be easy. But if it can save you a lot of money, it's worth doing.
2. Now figure out average annual R&D expenditures for the same five-year period.
3. Calculate a ratio of the two by dividing the average R&D spending by average gross receipts. Now you have a percentage. (If your company was formed after the base period, use 3 percent as a standard percentage.)
4. Figure the credit allowed for 1994. Take your average annual gross receipts from the previous four-year period (in this case, 1990-93), and multiply that by the percentage determined in steps 1 to 3 to get a dollar amount. The full credit for 1995 equals 20 percent of every eligible R&D expenditure above that amount.
If your average annual gross receipts for 1990-93 were $3 million, and your ratio from step 3 was 2 percent, then 2 percent of $3 million is $60,000. That means 20 percent of whatever you spent on R&D above $60,000 can be subtracted directly from your tax bill as a credit.
Technically, you can now claim credits for 1993, 1994 and the first half of 1995. For the many corporations planning to file 1995 returns in September under an extension, 1992 remains open to claims as well.
The point of all this, from the government's side, is to encourage ongoing increases in R&D spending. That's why, as the math shows, if you want to qualify for credits year in and year out, actual dollars spent on R&D must continually rise. Remember, this is an incremental tax credit-it applies only to the 20 percent of R&D spending above a base amount. Of course, if you are filing under the Alternative Minimum Tax schedule, R&D credits would have to be carried forward.