How to Calculate the Base Year for R&D Tax Credits
- 1). Determine whether the expenses fall under the R&D credit definition. This should be done by a qualified group of tax or accounting experts.
- 2). Gather data. You will need all W-2 wages for employees working on research and development activities. If an employee spends more than 80 percent of his time working on R&D activities, 100 percent of his wages should be counted for the R&D credit.
- 3). Review the base-year formula. The base year is 12 months (consecutive) from the start of production.
- 4). Define the variables. Let's work through an example for clarity. XYZ Corporation began doing business on January 1, 2005. XYZ began producing zeolite in Arizona on September 1, 2005. It produced 3,000 tons of zeolite during the next 12 months.
- 5). Calculate the base year. In our example, September 1, 2005, is the date of production. For XYZ, the base year is September 1, 2005 to August 31, 2005. Base-year production is 3,000 tons.
