Federal and State Research and Development Tax
Just to make sure I understand all the specifics with the state and federal research and development/experimentation tax credits, so I submit some examples to you. I will submit each scenario as a separate question as you experts may determine that they are quite different. When googling for r & d tax credit, the first US state that comes up with specifics is arizona, so we'll use that. It specifies a 24% credit above excess QREs...
A genius research scientist form a lab (S-Corp) in Arizona (in 2013) looking for the cure to all illnesses. He is the sole owner of the S-Corp and shares control of the lab with no one. He somehow manages to get contracts with a pharmaceutical, and he will produce $1.2M in revenue over the next year. He will need $200K of lab equipment. Since he controls his own salary, he decides to take $1M in salary, to maximize the research credit (of course he'll pay a bit for this with self-employment taxes). The rest of the profits ($0M) will flow through distributed equally (because of the pass-through of the S-Corp). Assuming no other personal deductions
, and rounding off numbers for simplicity, let's assume AZ flax tax rate of 4% and fed flat tax
rate of %35. All tax rates
are personal tax
rates (since S-Corp doesn't pay corporate taxes
and all credits will pass-through).Federal Tax
= 35% of $1M = $350K
AZ Tax = 4% of $1M = $40K
Computation of the Federal R&E (Research and Experimentation) tax credit
The salary and equipment all qualify as research expenditures. This makes research expenditures to be equal to $1.2M. Also note: I've read that since this is the first year and there is no historical research expenditures to form a base amount, the QRE has a flat credit rate of 6%.
Federal R&E tax credit =
0.06 * $1.2M = $72K
Arizona R&D tax credit (requires regular research credit calculation) =
Current year's QREs will be: $1.2M
Initial Fixed Base Percentage will be 3%
Lesser or FBP or 16% = 3%
Multiplied by avg. annual gross receipts
= Base Amount of $36K
Greater of base amount or %50 of current QRE = $600K
Excess of current QRE = $564K
Arizona tax credit for 2013 = 24% of excess QRE = ~$135K
Arizona tax credit refund (up to 75% of excess) = ($135K - $40K) * 0.75 = $67.5K
First of all, please correct me where I may have computed some of these things wrong.
The federal tax credit makes a little sense to me, since the tax rate is so high. However the state tax credit (for any research heavy organization) will likely wipe-out all state tax liability (if I have the computation right). Furthermore, the newer Arizona tax credit refund is where I truely believe I may be misunderstanding something. Is AZ really refunding up to $67.5K? If no equipment is needed, it seems like this program will subsidize the income of this genius... Perhaps I have something wrong here...I just want to make sure I have a solid grasp of these programs.