§ 41. Credit for increasing research activities
(a)
General rule
For purposes of section
38, the research credit determined under this section for the taxable year shall be an amount equal to the sum of—
(b)
Qualified research expenses
For purposes of this section—
(1)
Qualified research expenses
The term “qualified research expenses” means the sum of the following amounts which are paid or incurred by the taxpayer during the taxable year in carrying on any trade or business of the taxpayer—
(2)
In-house research expenses
(A)
In general
The term “in-house research expenses” means—
(iii)
under regulations prescribed by the Secretary, any amount paid or incurred to another person for the right to use computers in the conduct of qualified research.
Clause (iii) shall not apply to any amount to the extent that the taxpayer (or any person with whom the taxpayer must aggregate expenditures under subsection (f)(1)) receives or accrues any amount from any other person for the right to use substantially identical personal property.
(B)
Qualified services
The term “qualified services” means services consisting of—
(ii)
engaging in the direct supervision or direct support of research activities which constitute qualified research.
If substantially all of the services performed by an individual for the taxpayer during the taxable year consists of services meeting the requirements of clause (i) or (ii), the term “qualified services” means all of the services performed by such individual for the taxpayer during the taxable year.
(3)
Contract research expenses
(A)
In general
The term “contract research expenses” means 65 percent of any amount paid or incurred by the taxpayer to any person (other than an employee of the taxpayer) for qualified research.
(B)
Prepaid amounts
If any contract research expenses paid or incurred during any taxable year are attributable to qualified research to be conducted after the close of such taxable year, such amount shall be treated as paid or incurred during the period during which the qualified research is conducted.
(C)
Amounts paid to certain research consortia
(i)
In general
Subparagraph (A) shall be applied by substituting “75 percent” for “65 percent” with respect to amounts paid or incurred by the taxpayer to a qualified research consortium for qualified research on behalf of the taxpayer and 1 or more unrelated taxpayers. For purposes of the preceding sentence, all persons treated as a single employer under subsection (a) or (b) of section
52 shall be treated as related taxpayers.
(D)
Amounts paid to eligible small businesses, universities, and Federal laboratories
(i)
In general
In the case of amounts paid by the taxpayer to—
for qualified research which is energy research, subparagraph (A) shall be applied by substituting “100 percent” for “65 percent”.
(ii)
Eligible small business
For purposes of this subparagraph, the term “eligible small business” means a small business with respect to which the taxpayer does not own (within the meaning of section
318) 50 percent or more of—
(iii)
Small business
For purposes of this subparagraph—
(I)
In general
The term “small business” means, with respect to any calendar year, any person if the annual average number of employees employed by such person during either of the 2 preceding calendar years was 500 or fewer. For purposes of the preceding sentence, a preceding calendar year may be taken into account only if the person was in existence throughout the year.
(iv)
Federal laboratory
For purposes of this subparagraph, the term “Federal laboratory” has the meaning given such term by section 4(6) of the Stevenson-Wydler Technology Innovation Act of 1980 (15 U.S.C. 3703
(6)), as in effect on the date of the enactment of the Energy Tax Incentives Act of 2005.
(4)
Trade or business requirement disregarded for in-house research expenses of certain startup ventures
In the case of in-house research expenses, a taxpayer shall be treated as meeting the trade or business requirement of paragraph (1) if, at the time such in-house research expenses are paid or incurred, the principal purpose of the taxpayer in making such expenditures is to use the results of the research in the active conduct of a future trade or business—
(c)
Base amount
(2)
Minimum base amount
In no event shall the base amount be less than 50 percent of the qualified research expenses for the credit year.
(3)
Fixed-base percentage
(A)
In general
Except as otherwise provided in this paragraph, the fixed-base percentage is the percentage which the aggregate qualified research expenses of the taxpayer for taxable years beginning after December 31, 1983, and before January 1, 1989, is of the aggregate gross receipts of the taxpayer for such taxable years.
(B)
Start-up companies
(i)
Taxpayers to which subparagraph applies
The fixed-base percentage shall be determined under this subparagraph if—
(ii)
Fixed-base percentage
In a case to which this subparagraph applies, the fixed-base percentage is—
(I)
3 percent for each of the taxpayer’s 1st 5 taxable years beginning after December 31, 1993, for which the taxpayer has qualified research expenses,
(II)
in the case of the taxpayer’s 6th such taxable year, 1/6 of the percentage which the aggregate qualified research expenses of the taxpayer for the 4th and 5th such taxable years is of the aggregate gross receipts of the taxpayer for such years,
(III)
in the case of the taxpayer’s 7th such taxable year, 1/3 of the percentage which the aggregate qualified research expenses of the taxpayer for the 5th and 6th such taxable years is of the aggregate gross receipts of the taxpayer for such years,
(IV)
in the case of the taxpayer’s 8th such taxable year, 1/2 of the percentage which the aggregate qualified research expenses of the taxpayer for the 5th, 6th, and 7th such taxable years is of the aggregate gross receipts of the taxpayer for such years,
(V)
in the case of the taxpayer’s 9th such taxable year, 2/3 of the percentage which the aggregate qualified research expenses of the taxpayer for the 5th, 6th, 7th, and 8th such taxable years is of the aggregate gross receipts of the taxpayer for such years,
(4)
Election of alternative incremental credit
(A)
In general
At the election of the taxpayer, the credit determined under subsection (a)(1) shall be equal to the sum of—
(i)
3 percent of so much of the qualified research expenses for the taxable year as exceeds 1 percent of the average described in subsection (c)(1)(B) but does not exceed 1.5 percent of such average,
(5)
Election of alternative simplified credit
(A)
In general
At the election of the taxpayer, the credit determined under subsection (a)(1) shall be equal to 14 percent (12 percent in the case of taxable years ending before January 1, 2009) of so much of the qualified research expenses for the taxable year as exceeds 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined.
(B)
Special rule in case of no qualified research expenses in any of 3 preceding taxable years
(6)
Consistent treatment of expenses required
(A)
In general
Notwithstanding whether the period for filing a claim for credit or refund has expired for any taxable year taken into account in determining the fixed-base percentage, the qualified research expenses taken into account in computing such percentage shall be determined on a basis consistent with the determination of qualified research expenses for the credit year.
(B)
Prevention of distortions
The Secretary may prescribe regulations to prevent distortions in calculating a taxpayer’s qualified research expenses or gross receipts caused by a change in accounting methods used by such taxpayer between the current year and a year taken into account in computing such taxpayer’s fixed-base percentage.
(7)
Gross receipts
For purposes of this subsection, gross receipts for any taxable year shall be reduced by returns and allowances made during the taxable year. In the case of a foreign corporation, there shall be taken into account only gross receipts which are effectively connected with the conduct of a trade or business within the United States, the Commonwealth of Puerto Rico, or any possession of the United States.
(d)
Qualified research defined
For purposes of this section—
(1)
In general
The term “qualified research” means research—
(C)
substantially all of the activities of which constitute elements of a process of experimentation for a purpose described in paragraph (3).
Such term does not include any activity described in paragraph (4).
(2)
Tests to be applied separately to each business component
For purposes of this subsection—
(A)
In general
Paragraph (1) shall be applied separately with respect to each business component of the taxpayer.
(3)
Purposes for which research may qualify for credit
For purposes of paragraph (1)(C)—
(4)
Activities for which credit not allowed
The term “qualified research” shall not include any of the following:
(A)
Research after commercial production
Any research conducted after the beginning of commercial production of the business component.
(B)
Adaptation of existing business components
Any research related to the adaptation of an existing business component to a particular customer’s requirement or need.
(C)
Duplication of existing business component
Any research related to the reproduction of an existing business component (in whole or in part) from a physical examination of the business component itself or from plans, blueprints, detailed specifications, or publicly available information with respect to such business component.
(E)
Computer software
Except to the extent provided in regulations, any research with respect to computer software which is developed by (or for the benefit of) the taxpayer primarily for internal use by the taxpayer, other than for use in—
(e)
Credit allowable with respect to certain payments to qualified organizations for basic research
For purposes of this section—
(1)
In general
In the case of any taxpayer who makes basic research payments for any taxable year—
(2)
Basic research payments defined
For purposes of this subsection—
(A)
In general
The term “basic research payment” means, with respect to any taxable year, any amount paid in cash during such taxable year by a corporation to any qualified organization for basic research but only if—
(3)
Qualified organization base period amount
For purposes of this subsection, the term “qualified organization base period amount” means an amount equal to the sum of—
(4)
Minimum basic research amount
For purposes of this subsection—
(A)
In general
The term “minimum basic research amount” means an amount equal to the greater of—
(B)
Floor amount
Except in the case of a taxpayer which was in existence during a taxable year (other than a short taxable year) in the base period, the minimum basic research amount for any base period shall not be less than 50 percent of the basic research payments for the taxable year for which a determination is being made under this subsection.
(5)
Maintenance-of-effort amount
For purposes of this subsection—
(A)
In general
The term “maintenance-of-effort amount” means, with respect to any taxable year, an amount equal to the excess (if any) of—
(B)
Nondesignated university contributions
For purposes of this paragraph, the term “nondesignated university contribution” means any amount paid by a taxpayer to any qualified organization described in paragraph (6)(A)—
(C)
Cost-of-living adjustment defined
(i)
In general
The cost-of-living adjustment for any calendar year is the cost-of-living adjustment for such calendar year determined under section
1
(f)(3), by substituting “calendar year 1987” for “calendar year 1992” in subparagraph (B) thereof.
(ii)
Special rule where base period ends in a calendar year other than 1983 or 1984
If the base period of any taxpayer does not end in 1983 or 1984, section
1
(f)(3)(B) shall, for purposes of this paragraph, be applied by substituting the calendar year in which such base period ends for 1992. Such substitution shall be in lieu of the substitution under clause (i).
(6)
Qualified organization
For purposes of this subsection, the term “qualified organization” means any of the following organizations:
(B)
Certain scientific research organizations
Any organization not described in subparagraph (A) which—
(C)
Scientific tax-exempt organizations
Any organization which—
(D)
Certain grant organizations
Any organization not described in subparagraph (B) or (C) which—
(i)
is described in section
501
(c)(3) and is exempt from tax under section
501
(a) (other than a private foundation),
(ii)
is established and maintained by an organization established before July 10, 1981, which meets the requirements of clause (i),
(iii)
is organized and operated exclusively for the purpose of making grants to organizations described in subparagraph (A) pursuant to written research agreements for purposes of basic research, and
(iv)
makes an election, revocable only with the consent of the Secretary, to be treated as a private foundation for purposes of this title (other than section
4940, relating to excise tax based on investment income).
(7)
Definitions and special rules
For purposes of this subsection—
(A)
Basic research
The term “basic research” means any original investigation for the advancement of scientific knowledge not having a specific commercial objective, except that such term shall not include—
(B)
Base period
The term “base period” means the 3-taxable-year period ending with the taxable year immediately preceding the 1st taxable year of the taxpayer beginning after December 31, 1983.
(C)
Exclusion from incremental credit calculation
For purposes of determining the amount of credit allowable under subsection (a)(1) for any taxable year, the amount of the basic research payments taken into account under subsection (a)(2)—
(D)
Trade or business qualification
For purposes of applying subsection (b)(1) to this subsection, any basic research payments shall be treated as an amount paid in carrying on a trade or business of the taxpayer in the taxable year in which it is paid (without regard to the provisions of subsection (b)(3)(B)).
(f)
Special rules
For purposes of this section—
(1)
Aggregation of expenditures
(A)
Controlled group of corporations
In determining the amount of the credit under this section—
(B)
Common control
Under regulations prescribed by the Secretary, in determining the amount of the credit under this section—
(i)
all trades or businesses (whether or not incorporated) which are under common control shall be treated as a single taxpayer, and
(ii)
the credit (if any) allowable by this section to each such person shall be its proportionate shares of the qualified research expenses, basic research payments, and amounts paid or incurred to energy research consortiums, giving rise to the credit.
The regulations prescribed under this subparagraph shall be based on principles similar to the principles which apply in the case of subparagraph (A).
(2)
Allocations
(A)
Pass-thru in the case of estates and trusts
Under regulations prescribed by the Secretary, rules similar to the rules of subsection (d) of section
52 shall apply.
(3)
Adjustments for certain acquisitions, etc.
Under regulations prescribed by the Secretary—
(A)
Acquisitions
If, after December 31, 1983, a taxpayer acquires the major portion of a trade or business of another person (hereinafter in this paragraph referred to as the “predecessor”) or the major portion of a separate unit of a trade or business of a predecessor, then, for purposes of applying this section for any taxable year ending after such acquisition, the amount of qualified research expenses paid or incurred by the taxpayer during periods before such acquisition shall be increased by so much of such expenses paid or incurred by the predecessor with respect to the acquired trade or business as is attributable to the portion of such trade or business or separate unit acquired by the taxpayer, and the gross receipts of the taxpayer for such periods shall be increased by so much of the gross receipts of such predecessor with respect to the acquired trade or business as is attributable to such portion.
(B)
Dispositions
If, after December 31, 1983—
(i)
a taxpayer disposes of the major portion of any trade or business or the major portion of a separate unit of a trade or business in a transaction to which subparagraph (A) applies, and
(ii)
the taxpayer furnished the acquiring person such information as is necessary for the application of subparagraph (A),
then, for purposes of applying this section for any taxable year ending after such disposition, the amount of qualified research expenses paid or incurred by the taxpayer during periods before such disposition shall be decreased by so much of such expenses as is attributable to the portion of such trade or business or separate unit disposed of by the taxpayer, and the gross receipts of the taxpayer for such periods shall be decreased by so much of the gross receipts as is attributable to such portion.
(C)
Certain reimbursements taken into account in determining fixed-base percentage
If during any of the 3 taxable years following the taxable year in which a disposition to which subparagraph (B) applies occurs, the disposing taxpayer (or a person with whom the taxpayer is required to aggregate expenditures under paragraph (1)) reimburses the acquiring person (or a person required to so aggregate expenditures with such person) for research on behalf of the taxpayer, then the amount of qualified research expenses of the taxpayer for the taxable years taken into account in computing the fixed-base percentage shall be increased by the lesser of—
(4)
Short taxable years
In the case of any short taxable year, qualified research expenses and gross receipts shall be annualized in such circumstances and under such methods as the Secretary may prescribe by regulation.
(5)
Controlled group of corporations
The term “controlled group of corporations” has the same meaning given to such term by section
1563
(a), except that—
(A)
“more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section
1563
(a)(1), and
(B)
the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section
1563.
(6)
Energy research consortium