A small number of tax credits remain for investments that are not necessarily targeted towards the disadvantaged or the environment. The credits include the rehabilitation credit for real estate, the research and development (R&D) credit, the orphan drug credit, the retirement plan start-up credit, and the employer-provided child care credit.
Research and development (R&D) credit. The R&D credit is designed to encourage businesses to increase the amounts they spend on research and experimental activities. The credit had expired on July 1, 1995, but was later reinstated to apply to qualified expenditures from July 1,1996, through June 30, 2004. This credit is one that has expired and been retroactively reinstated several times in the past, so it's likely that it will continue to be extended in the future.
The R&D credit is generally 20 percent of the amount by which your research expenses for the year are higher than your "base period amount." In order to qualify for the credit, the research must be technological in nature (not research in the social sciences, arts, or humanities) and must be intended to be useful in the development of a new or improved business component. Further, it must relate to a new or improved function, performance, reliability, or quality. Qualified research expenses includes in-house research, 65 percent of the cost of research done by a person other than an employee of the taxpayer, and 75 percent of the costs paid to a qualified scientific research consortium.
The R&D credit is claimed on Form 6765, Credit for Increasing Research Activities, and is part of the general business credit.
Orphan drug credit. The orphan drug credit is designed to encourage development of drugs for rare diseases and conditions, the occurrences of which are so infrequent that drug development would otherwise be economically unfeasible. The credit expired at the end of 1994, but was permanently reinstated for qualified testing expenses paid or incurred after July 1, 1996.
The credit is equal to 50 percent of the qualified clinical testing expenses for the year. The orphan drug credit operates in much the same fashion as the R&D credit, except that there is no requirement that expenses exceed a base amount. Where the same expenses would qualify for both the orphan drug credit and the R&D credit, you must choose between them - the same expenses can't be claimed as a credit twice. The orphan drug credit is claimed on Form 8820, Orphan Drug Credit.
Rehabilitation credit. This tax credit is designed to encourage the rehabilitation of older real estate or certified historic buildings. It allows you to take a tax credit for the expenses you have for renovating, restoring, or rehabilitating (but not enlarging or adding new construction to) certain structures. The percentage of expenses you can take as a credit is 10 percent for buildings originally placed in service before 1936, and 20 percent for buildings listed in the National Register of Historic Places. The credit is further limited to the tax paid on $25,000 and is phased out for taxpayers with adjusted gross incomes between $200,000 and $250,000. If a project involves both rehabilitation and enlargement, only the costs allocated towards rehabilitation are eligible for the credit.
If you claim this credit, you must reduce the depreciable tax basis of the property by the amount of the credit.
To be eligible for the credit the rehabilitation expenditures must be for nonresidential real property. An exception to this rule applies to certified historic structures, which may be used as residential rental property. The building must be "substantially rehabilitated;" that is, the expenses in some 24-month period must be more than the greater of $5,000 or your adjusted basis in the building. Also, unless the building is a certified historic structure, at least 75 percent of the external walls must be retained, with 50 percent or more kept in place as external walls, and at least 75 percent of the existing internal structural framework of the building must be retained in place.
The rehabilitation credit is part of the investment tax credit, and can be recaptured (paid back to the IRS) if the qualifying property is sold or disposed of within five years of the time it's placed in service. The credit is claimed on Form 3468, Investment Tax Credit.
Retirement plan start-up credit. In order to stimulate greater retirement saving, small employers who establish new retirement plans beginning in 2002 will be entitled to a tax credit for doing so. The credit is only available to employers with 100 employees or less who have not maintained a qualified retirement plan during the three-year period immediately before the first effective year of the new plan.
The credit amounts to 50 percent of the costs incurred in creating or maintaining a new qualified plan, up to a maximum of $500 in each of the first three years the plan is effective. Essentially, this means that you have to spend at least $1,000 per year to get the full credit. Any set-up and administration costs not offset by the tax credit (i.e. those above $1,000 in the first three years and those incurred after the first three years) are deductible as ordinary and necessary business expenses.
Employer-provided child care credit. Beginning in the 2002 tax year, small, as well as middle-sized, businesses will be eligible for a tax credit of 25 percent of the qualified child care expenses they provide and 10 percent of the cost of qualified child care resource and referral services they offer. The employer-provided credit is capped at $150,000 per tax year.
Expenses eligible for the credit include payments under a contract with a
qualified child care facility to provide child care services to the business's
employees. Qualified childcare expenses also include the amounts paid or
incurred by the employer to acquire, construct, establish, and operate a
qualified child care facility for employees. The facility itself must meet any
state and local government laws and regulations, like licensing requirements,
that may apply for its location.