Who gets the R&D tax credit?

May 2010

"We hired a small software development firm to do a technology research project for us last year. Now we're having an argument over who gets the R&D tax credit. The developer says they're doing the work, so they're entitled to the full tax credit. Is that legitimate?"

Mike: It's a question that should have come up when you were negotiating the contract, but yes, it's a reasonable request. However, the actual amount may be very difficult to calculate. An R&D tax credit for one year is limited to 25% of the taxpayers tax liability over $25,000, unused credits may be carried forward up to 20 years, a major portion (35%) of contracted R&D costs are excluded, and you may have to pay state income taxes on the credits. Bottom line, the credit generated by this work may be minimal, and you'll probably have to disclose sensitive tax information to the developer, which I suspect you don't want to do.

Rather than argue over these details, I suggest you offer to rebate half the value of whatever credit the government ultimately gives you.