Technically the R&D credit expired on December 31, 2009. But fear not. There is much talk in Congress and among professional tax experts resident in Washington, D.C. that the R&D tax credit will be reinstated, retroactive to January 1, 2010. This article will help you, the small business owner, to gear up for the reinstated R&D tax credit.

What Expenses Qualify for the R&D Credit:
The broad definition of expenses that qualify for the R&D credit require that such costs be undertaken to discover information that is technological  and intended to be useful in the development of a new or improved business component. This may include research on new products/components or improvement of existing products/components.

The category of expenses that qualify include the following:
1.  Wages paid for employees involved in research activities;
2.  The cost of supplies used in research activities;
3.  Payments to third parties for research activities (limited to 65% of your total cost)

General Credit Amount:
Under the general rules in effect in 2009 the credit is equal to 20% of the qualified expenses over the "base" amount (the average amount over the prior four years. For example, if your base amount is $4,000 and your current year research expenses is $10,000, you are entitled to a credit of $1,200 ($6,000 multiplied by 20%). Under the incremental rules (simplified credit rules) your credit is based on a stated percentage of qualified expenses exceeding the average research expenses over the prior four-year period.

Simplified Credit Amount:
1.  With the simplified credit, a business can claim a credit equal to 12% of the qualified research expenses exceeding 50% of the average qualified research expenses for the previous three years or;
2.  A credit equal to 6% of such expenses for start-up businesses

Incremental Credit Amount:
1.  3% of qualified research expenses between 1% and 1.5% of average annual gross receipts or;
2.  4% of qualified research expenses between 1.5% and 2% of average annual gross receipts or;
3.  5% of qualified research expenses exceeding 2% of average annual gross receipts.

You can claim the credit for 100% of your regular employee salaries as long as 80% of their time is spent on research. The related new or improved product/component must be one that is evolutionary in nature and not revolutionary (dramatic change in product line or component).