The long-awaited extension of the Sec. 41 research credit arrived in the Emergency Economic Stabilization Act of 2008, P.L. 110-343 (EESA), which contains the Tax Extenders and Alternative Minimum Tax Relief Act of 2008. On October 3, 2008, Congress passed the act and President Bush signed it into law.
The research credit had expired for amounts paid or incurred after December 31, 2007; however, EESA retroactively extends the research credit to amounts paid or incurred after December 31, 2007, and before January 1, 2010, with the following changes: EESA increases the credit rate under the alternative simplified credit (ASC) method from 12% to 14%, but only for tax years ending after December 31, 2008. Also, the alternative incremental research credit (AIRC) is eliminated for tax years beginning after December 31, 2008.
Implications
Given the current economic conditions, this retroactive extension potentially creates both cash benefits and earnings-per-share benefits for taxpayers. As a result of the retroactive extension of the research credit implemented under this law, taxpayers will need to consider the financial statement effect of the research credit’s now being available available for 2008. Taxpayers will also need to consider the effect of the research credit’s retroactive extension on their estimated tax payments for the 2008 tax year.
Fiscal-year taxpayers that have already filed their 2007 tax year returns should consider filing amended returns to claim research credits related to the period for which the credit had expired. In light of the increasing scrutiny taxpayers are experiencing at IRS examinations, taxpayers should consider assessing the approaches used and the documentation maintained to support their research credits. This retroactive extension also opens up the opportunity for taxpayers to consider a pre-filing agreement for the research credit for their 2008 tax year.
Taxpayers that are not currently reporting research credits under the ASC method will need to analyze the effect of the ASC rate increase beginning for tax years ending after December 31, 2008. Fiscal-year taxpayers whose 2007 tax year has already closed are currently subject to the new 14% ASC rate. In addition, taxpayers that are currently using the AIRC method will need to evaluate whether to use the regular credit or ASC for tax years beginning after December 31, 2008.
EditorNotes
David Kautter is a partner with Ernst & Young LLP in Washington, DC.
Contributors are members of or associated with Ernst & Young LLP.
For additional information about these items, contact Mr. Kautter at (202) 327-8878 or david.kautter@ey.com.
