Wipfli Alerts & Updates: More Wisconsin Businesses to Qualify for Tax Savings Through Research Credit


September 20, 2013
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Until recently, the Wisconsin research credit was available only to C corporations.  As part of the Wisconsin Budget Bill that was recently enacted, the availability of the research credit has expanded significantly and is now available to be claimed by S corporations, partnerships, and sole proprietorships for tax years beginning after December 31, 2012. This will provide an opportunity for businesses in Wisconsin to reduce their tax liability by claiming the research credit.
 
The starting point for the Wisconsin credit is the Internal Revenue Code. Wisconsin piggybacks off IRC §41 and the corresponding regulations in determining which activities constitute qualified research and which expenses are eligible for the credit. Wisconsin then modifies the federal rules by limiting the qualified expenses to those incurred in Wisconsin and to Wisconsin gross receipts in determining the base period percentage and base amounts.
 
Getting Technical
The research credit is misunderstood by many companies. Normally, when companies think of research and development (R&D) they are focused on the development of new, cutting-edge products or design standards for their industry. While these highly technical activities generally qualify for the research credit, many of the day-to-day activities of companies may qualify as well. For income tax purposes, the definition of a qualified activity for the research credit includes not only the development of new products, but also the development of manufacturing processes required to produce parts, as well as improvements to products, processes, techniques, formulas, patents, and software applications. Many companies do not realize that these types of activities may qualify for the credit and generate significant tax savings.
 
The research credit can apply to a variety of companies including manufacturers, software developers, engineers, design/build contractors, and architects. If your company performs any of the following activities, it may qualify for the credit:
 
  • Manufacture products
  • Develop new, improved, or more reliable products/processes/formulas
  • Develop prototypes and models, including computer-generated models
  • Design tools, jigs, dies, molds, or fixtures
  • Design products to customer specifications
  • Develop or apply for patents
  • Conduct new concept and technology testing
  • Develop new technology
  • Attempt to use new materials
  • Add new equipment
  • Improve or build new manufacturing facilities
  • Automate/streamline internal processes
  • Develop software or hardware
  • Prepare feasibility studies
  • Incorporate new construction materials into building designs
  • Design buildings to achieve a certain energy efficiency goal
  • Design buildings with unique features or space plans
  • Develop temporary structures used in the construction process
 
Calculating the Credit
In calculating the research credit, one of two calculation methods is available, with a maximum credit rate of 5% of the qualified research expenses (QRE). Both methods require companies to calculate a base amount, and the credit is then determined based on the increased QREs in the current year over the base amount.
 
Unlike other incentives with the State of Wisconsin, there is no application process or approval process to claim the credit. The credit is claimed by preparing a schedule that is included with the tax return. Companies that have not claimed the federal credit previously are still eligible to claim the state credit.
 
Companies of all sizes and in various industries will benefit from the credit. Businesses need to start to plan now to ensure they have identified the correct activities that qualify for the credit as well as the corresponding expenses that will qualify. In addition, businesses need to ensure they have documentation that supports that the activities and expenses identified qualify for the credit.
 
Maximizing Your Opportunities
Proper understanding of the tax law can result in substantial savings. Wipfli’s dedicated team of tax professionals specializing in R&D tax law provided technical guidance to Wisconsin legislators and Governor Walker to help draft the proposed legislation expanding availability of the research credit. These specialists are ready to help you. Please contact Scott Schumacher, Valerie Fedie, Christopher Blaylock or your Wipfli relationship executive for assistance. Visit our website to read additional articles and view a recorded webinar to learn more.
 

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