Alternative Simplified Credit

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Internal Revenue Code (I.R.C.) § 41 provides taxpayers with a tax credit for increasing research and experimentation (”R&E”) activities. The alternative simplified research credit (”ASC”) is equal to twelve percent of the taxpayer’s current year qualified research expenses (”QREs”) above fifty percent of its average QREs in the three previous years. If the taxpayer has no QREs in any of those years, the credit is equal to six percent of the taxpayer’s QREs in the current tax year.

Qualified Research Expenses

Qualified research expenses can include wage costs, supply costs, contractor costs and certain computer rental expenses that the taxpayer paid or incurred for qualified services in carrying on the taxpayer’s trade or business. The two key terms are “qualified services” and “qualified research.”

Qualified Services

The term “qualified services” involves directly engaging in qualified research or engaging in the direct supervision or direct support of research activities that constitute qualified research. The term “direct supervision” means the immediate supervision of qualified research and the term “direct support” means services in the direct support of either persons engaging in actual conduct of qualified research or persons who are directly supervising persons engaging in the actual conduct of qualified research.

Qualified Research

The term “qualified research” includes research:

• with respect to which expenditures may be treated as expenses under I.R.C. § 174;
• which is undertaken for the purpose of discovering information that is technological in nature and the application of which is intended to be useful in the development of a new or improved business component of the taxpayer; and
• substantially all of the activities of which constitute elements of a process of experimentation for the purpose of achieving a new or improved function, performance, or reliability or quality.