Tax professionals preparing 2015 returns for Massachusetts-based manufacturing and technology companies should beware of a considerable error contained in the state’s online instructions for claiming the R&D tax credit that, if not recognized, could cost their innovation clients substantial dollars in the form of tax overpayments.
In August of 2014, the Massachusetts legislature enacted An Act Promoting Economic Growth in the Commonwealth that included business-favorable provisions altering the method for computing the state’s research tax credit for 2015 and subsequent years. The principal modifications of the R&D tax credit outlined in the bill relate to the base amount calculation for the existing “regular” credit calculation method and the creation of an “alternative simplified” credit calculation method wherein lies an instructional error. According to the state’s 2014 economic bill, Section I states, “For calendar years 2015, 2016, and 2017, the amount of the credit is equal to 5% of the taxpayer’s qualified research expenses for the taxable year that exceeds 50% of the taxpayer’s average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined.”
Simple enough; however, the updated instructions for completing Schedule RC, which were only recently posted on the Massachusetts DOR website, contains a potentially costly error. According to the directions for computing the “base amount” on Line 14, the tax preparer is advised to select one of the two ovals labeled 10% and 5% (which are actually displayed on Line 16) and then enter the base amount in accordance with subsequent instructions. For corporations electing to compute the R&D credit using the alternative simplified method, the tax preparer is instructed to “select the 5% oval and enter the average of the qualified research expenses for the last 3 taxable years.”
That all seems fairly easy, but if you’re not accustomed to the old-fashioned shell game, you might not notice the problem contained in the Line 14 instruction, which fundamentally fails to tell the tax preparer to multiply the 3-year average of the research expenses by 50%. The mistake of not reducing the average expenditures by one-half ultimately causes the tax credit to be significantly less than the law intended.
Intrepid Advisors is a specialized business consulting firm offering expertise and advisory services relating to the federal and state R&D Tax Credits, and for over the past 25 years the firm has been assisting innovation companies throughout the United States in obtaining the maximum allowable R&D credits. The firm’s outstanding success stems from extensive knowledge and experience regarding the federal and state regulations, as well as an expert staff of engineers, scientists, tax accountants, and technical advisors from a variety of industries.