Fed R&D Tax Credit: University "Basic Research" Credit

University Basic Research Credit

 

Corporate taxpayers (generally excluding S-Corporations, primarily service oriented corporations, tax-exempt, or banking / investment services corporations) that enter into contracts with certain nonprofit organizations to perform basic research on its behalf may be able to claim an separate and additional non-refundable incremental University Basic Research Credit (aka "Basic Research Credit") for some of their expenditures for this purpose under IRC § 41(a)(2) and (e). For the purpose of the Basic Research Credit pursuant to IRC § 41(e), Basic Research is defined as "any original investigation for the advancement of scientific knowledge not having a specific commercial objective." Similar to the general R&D tax credit, the Basic Research Credit does not apply to qualified basic research done outside the United States, or to basic research in the social sciences, arts, or the humanities. Moreover, the University Basic Research credit can be taken in addition to the (1) "Traditional" R&D Tax Credit and (2) the Energy Research Consortium Tax Credit.

The Basic Research Credit generally applies only to payments for qualified research performed under a written contract by the following general types of organizations:

  • educational institutions;

  • nonprofit scientific research organizations (excluding private foundations); and

  • certain grant-giving organizations.

Corporations internally performing their own Basic Research may not claim the Basic Research Credit for their internal expenditures, but that same internal Basic Research spending may still be included as qualified research expenses (QRE) for the general R&D tax credit provided under IRC § 41(a). In addition, Basic Research Payments eligible for the Basic Research Credit that fall below the Base Amount are treated as contract research expenses and may be included in the QREs for the "traditional" R&D tax credit as well.

The Basic Research Credit is intended to foster collaborative research involving U.S. firms and colleges and universities, as a supplement credit benefit to the general R&D tax credit for U.S. corporate taxpayers. It is equal to 20% of total payments for qualified Basic Research made during the current year above a Base Amount, which is called the "Qualified Organization Base Period Amount" ("QOBPA").

In general, this represents the excess of (1) 100% of corporate cash payments (including, donations, grants or contribution cash equivalents) paid for Basic Research conducted by third-party universities (e.g. certain nonprofit scientific research organizations, etc.) over (2) the sum of (a) the greater of two minimum basic research floors plus (b) an amount reflecting any decrease in non-research giving to universities by the corporation as compared to such giving during a 3-year fixed-base period, as adjusted for inflation.

Below further outlines the rules, tax code authority, and criteria for calculating the Basic Research Credit. Many companies tend to miss the opportunity to claim this benefit (including the "Energy Research Consortium Credit") when calculating, documenting, and claiming the general R&D tax credit. However, depending on your business structure and activities, the Basic Research Credit may be an additional opportunity to take advance of government tax incentives available to support your business.

Basic Research

Basic research means any original investigation for the advancement of scientific knowledge not having a specific commercial objective. The research must be conducted in the United States and must involve the hard sciences (i.e., not involve research in the social sciences, arts or humanities).

IRC § 41(e)(7)(A) defines 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— (i) Basic Research conducted outside of the United States, and (ii) Basic Research in the social sciences, arts, or humanities.

Basic Research Tax Credit Calculation

IRC § 41(a)(2) provides 20% of the "Basic Research Payments" determined under IRC § 41(e)(1)(A) made by Corporations to any "Qualified Organization" for Basic Research (advancement of scientific knowledge not having a specific commercial objective) may qualify for the University Basic Research Credit during the current year over its "Qualified Organization Base Period Amount" (QOBPA). The portion of the Basic Research Payments which does not exceed the taxpayer’s QOBPA may be treated as contract expenses for purposes of the general R&D tax credit.

 

IRC § 41(e)(2)(B) provides the general R&D research tax credit can be taken in addition to the Basic Research Tax Credit. And again, per IRC § 41(e)(2)(A), the portion of such basic research payments which does not exceed the qualified organization base period amount shall be treated as contract research expenses for purposes of the general R&D tax credit.

IRC § 41(e)(1)(A) states the amount of Basic Research Payments taken into account shall be equal to the excess of Basic Research Payments, over Qualified Organization Base Period Amount (QOBP), and that portion of such Basic Research Payments which does not exceed the Qualified Organization Base Period Amount (QOBPA) shall be treated as contract research expenses for purposes of the traditional R&D tax credit calculation provided under IRC § 41(a)(1).

Basic Research Payments

IRC § 41(e)(2)(A) states for the "Basic Research Payments" to qualify, in general the following must be present:

  • cash payments (including grants or contributions) must be made by a corporation to any "Qualified Organization" for "Basic Research" on the Corporation's behalf;

    • IRC § 41(e)(7)(E) states the following types of corporations INELIGIBLE for the basic research credit include

      • (i) an S corporation,

      • (ii) a personal holding company (as defined in section 542), or​

      • (iii) a service organization (as defined in section 414(m)(3)).​

  • pursuant to a written agreement between between such Corporation and such Qualified Organization; and

  • the research must also be performed by the "Qualified Organization" (i.e. tax-exempt organization) 

IRC § 41(e)(6) defines the term “Qualified Organization” as any of the following organizations: 

  • Educational Institutions

  • Certain Scientific Research Organizations

  • Scientific Tax-Exempt Organizations

  • Certain Grant Organizations

Qualified Organization Base Period Amount (QOBPA)

Qualified Organization Base Period Amount ("QOBPA") is the sum of the taxpayer’s minimum basic research amount (“MBRA”) and maintenance-of-effort amount (“MOEA”) in the base period pursuant to IRC § 41(e)(3). MBRA and MOEA are defined in IRC § 41(e)(4) and (5). The Base Period is the three tax years preceding the taxpayer’s first taxable year (i.e. first year incurring gross receipts) beginning after December 31, 1983.

IRC § 41(e)(3) defines the term “Qualified Organization Base Period Amount" (QOBPA) means an amount equal to the sum of:

(A) the Minimum Basic Research Amount (MBRA), plus

(B) the Maintenance-of-Effort Amount (MOEA).

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