Fed R&D Tax Credit: University "Basic Research" Credit
University Basic Research Credit
Corporate taxpayers (generally excluding S corporations, tax-exempt entities, and banking or investment services corporations) that enter into contracts with certain nonprofit organizations to perform basic research on their behalf may be eligible to claim a separate and additional non-refundable incremental University Basic Research Credit (also known as the "Basic Research Credit") under IRC §41(a)(2) and §41(e).
For purposes of the Basic Research Credit under IRC §41(e), "basic research" is defined as any original investigation for the advancement of scientific knowledge not having a specific commercial objective. This definition excludes research conducted outside the United States and research in the social sciences, arts, or humanities.
The University Basic Research Credit may be claimed in addition to:
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"Traditional" R&D Tax Credit under IRC §41(a)(1) and
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Energy Research Consortium Tax Credit under IRC §41(a)(3).
Eligible Organizations
The Basic Research Credit generally applies only to payments for qualified research performed under a written contract by the following general types of organizations:
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educational institutions;
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nonprofit scientific research organizations (excluding private foundations); and
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certain grant-giving organizations.
Corporations conducting basic research internally are not eligible for the Basic Research Credit for those internal expenditures. However, such internal basic research costs may still qualify as qualified research expenses (QREs) under the general R&D credit.
Additionally, Basic Research Payments that fall below the taxpayer’s base amount may be treated as contract research expenses and included in QREs for the general R&D credit.
Credit Calculation
The Basic Research Credit is designed to encourage collaborative research between U.S. corporations and universities. It equals 20% of the amount of qualified basic research payments made during the current tax year that exceed a base amount, known as the Qualified Organization Base Period Amount (QOBPA).
The QOBPA is calculated as follows:
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100% of corporate cash payments (including grants, donations, or equivalent contributions) made for basic research conducted by qualified third-party organizations, minus
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The sum of:
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The greater of two minimum basic research floors, and
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Any reduction in non-research giving to universities compared to the corporation’s giving during a fixed three-year base period, adjusted for inflation.
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This structure ensures that only incremental increases in basic research funding are rewarded with the credit.
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 is defined as any original investigation for the advancement of scientific knowledge that does not have a specific commercial objective. To qualify:
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The research must be conducted within the United States
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It must involve the hard sciences (e.g., biology, chemistry, engineering)
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It must exclude research in the social sciences, arts, or humanities
Under IRC §41(e)(7)(A), basic research does not include:
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Research conducted outside the United States
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Research in the social sciences, arts, or humanities
Basic Research Tax Credit Calculation
IRC §41(a)(2) provides a credit equal to 20% of Basic Research Payments made by a corporation to a Qualified Organization for basic research, to the extent those payments exceed the corporation’s Qualified Organization Base Period Amount (QOBPA).
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Payments below the QOBPA may be treated as contract research expenses and included in the general
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R&D tax credit under IRC §41(a)(1)
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The general R&D credit can be claimed in addition to the Basic Research Credit under IRC §41(e)(2)(B)
IRC §41(e)(1)(A) confirms that the Basic Research Credit is calculated as:
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The excess of Basic Research Payments over the QOBPA
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Payments below the QOBPA are treated as contract research expenses for the general R&D credit
Basic Research Payments
To qualify under IRC §41(e)(2)(A), Basic Research Payments must meet the following criteria:
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Be cash payments (including grants or contributions)
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Be made by a corporation to a Qualified Organization
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Be made pursuant to a written agreement
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Be for basic research conducted by the Qualified Organization on behalf of the corporation
IRC §41(e)(7)(E) excludes the following entities from claiming the Basic Research Credit:
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S corporations
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Personal holding companies (as defined in IRC §542)
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Service organizations (as defined in IRC §414(m)(3))
Qualified Organizations
Under IRC §41(e)(6), a Qualified Organization includes:
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Educational institutions
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Certain scientific research organizations
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Scientific tax-exempt organizations
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Certain grant-making organizations
Qualified Organization Base Period Amount (QOBPA)
The QOBPA is defined under IRC §41(e)(3) as the sum of:
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The Minimum Basic Research Amount (MBRA) under IRC §41(e)(4)
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The Maintenance-of-Effort Amount (MOEA) under IRC §41(e)(5)
The base period is the three tax years preceding the taxpayer’s first taxable year beginning after December 31, 1983.