SEC. 41. CREDIT FOR INCREASING RESEARCH ACTIVITIES. 41(a ...

1 SEC. 41. CREDIT FOR INCREASING RESEARCH (a) general purposes of section 38 , the RESEARCH CREDIT determined under this section for the taxableyear shall be an amount equal to the sum of--41(a)(1) 20 percent of the excess (if any) of--41(a)(1)(A) the qualified RESEARCH expenses for the taxable year, over41(a)(1)(B) the base amount, and41(a)(2) 20 percent of the basic RESEARCH payments determined under subsection (e)(1)(A).41(b) QUALIFIED RESEARCH purposes of this section--41(b)(1) QUALIFIED RESEARCH term qualified RESEARCH expenses meansthe sum of the following amounts which are paid or incurred by the taxpayer during thetaxable year in carrying on any trade or business of the taxpayer--41(b)(1)(A) in-house RESEARCH expenses, and41(b)(1)(B) contract RESEARCH (b)(2) IN-HOUSE RESEARCH (b)(2)(A) IN term in-house RESEARCH expenses means--41(b)(2)(A)(i) any wages paid or incurred to an employee for qualified servicesperformed by such employee,41(b)(2)(A)(ii) any amount paid or incurred for supplies used in the conduct ofqualified RESEARCH , and41(b)(2)(A)(iii) under regulations prescribed by the Secretary, any amount paid orincurred to another person for the right to use computers in the conduct of (iii)

2 Shall not apply to any amount to the extent that the taxpayer (or any person withwhom the taxpayer must aggregate expenditures under subsection (f)(1)) receives or accruesany amount from any other person for the right to use substantially identical (b)(2)(B) QUALIFIED term qualified services means servicesconsisting of--41(b)(2)(B)(i) engaging in qualified RESEARCH , or41(b)(2)(B)(ii) engaging in the direct supervision or direct support of researchactivities which constitute qualified substantially all of the services performed by an individual for the taxpayer during thetaxable year consists of services meeting the requirements of clause (i) or (ii), the term qualified services means all of the services performed by such individual for thetaxpayer during the taxable (b)(2)(C) term supplies means any tangible property other than--41(b)(2)(C)(i) land or improvements to land, and41(b)(2)(C)(ii) property of a character subject to the allowance for (b)(2)(D) 41(b)(2)(D)(i) IN term wages has the meaning given such term bysection 3401(a).

3 41(b)(2)(D)(ii) SELF-EMPLOYED INDIVIDUALS AND the caseof an employee (within the meaning of section 401(c)(1) ), the term wages includesthe earned income (as defined in section 401(c)(2) ) of such (b)(2)(D)(iii) EXCLUSION FOR WAGES TO WHICH WORK OPPORTUNITY term wages shall not include any amount taken into account indetermining the work opportunity CREDIT under section 51(a) .41(b)(3) CONTRACT RESEARCH (b)(3)(A) IN term contract RESEARCH expenses means 65 percent ofany amount paid or incurred by the taxpayer to any person (other than an employee of thetaxpayer) for qualified (b)(3)(B) PREPAID any contract RESEARCH expenses paid or incurredduring any taxable year are attributable to qualified RESEARCH to be conducted after theclose of such taxable year, such amount shall be treated as paid or incurred during theperiod during which the qualified RESEARCH is (b)(3)(C) AMOUNTS PAID TO CERTAIN RESEARCH (b)(3)(C)(i) IN (A) shall be applied by substituting 75percent for 65 percent with respect to amounts paid or incurred by the taxpayer to aqualified RESEARCH consortium for qualified RESEARCH on behalf of the taxpayer and 1 ormore unrelated taxpayers.

4 For purposes of the preceding sentence, all persons treated asa single employer under subsection (a) or (b) of section 52 shall be treated as (b)(3)(C)(ii) QUALIFIED RESEARCH term qualified researchconsortium means any organization which--41(b)(3)(C)(ii)(I) is described in section 501(c)(3) or 501(c)(6) and is exemptfrom tax under section 501(a) ,41(b)(3)(C)(ii)(II) is organized and operated primarily to conduct scientificresearch, and41(b)(3)(C)(ii)(III) is not a private (b)(4) TRADE OR BUSINESS REQUIREMENT DISREGARDED FOR IN-HOUSE RESEARCHEXPENSES OF CERTAIN STARTUP the case of in-house RESEARCH expenses, ataxpayer shall be treated as meeting the trade or business requirement of paragraph (1) if, atthe time such in-house RESEARCH expenses are paid or incurred, the principal purpose of thetaxpayer in making such expenditures is to use the results of the RESEARCH in the activeconduct of a future trade or business--41(b)(4)(A) of the taxpayer, or41(b)(4)(B) of 1 or more other persons who with the taxpayer are treated as a singletaxpayer under subsection (f)(1).

5 41(c) BASE (c)(1) IN term base amount means the product of--41(c)(1)(A) the fixed-base percentage, and 41(c)(1)(B) the average annual gross receipts of the taxpayer for the 4 taxable yearspreceding the taxable year for which the CREDIT is being determined (hereinafter in thissubsection referred to as the CREDIT year ).41(c)(2) MINIMUM BASE no event shall the base amount be less than 50percent of the qualified RESEARCH expenses for the CREDIT (c)(3) FIXED-BASE (c)(3)(A) IN as otherwise provided in this paragraph, the fixed-base percentage is the percentage which the aggregate qualified RESEARCH expenses of thetaxpayer for taxable years beginning after December 31, 1983, and before January 1,1989, is of the aggregate gross receipts of the taxpayer for such taxable (c)(3)(B) START-UP (c)(3)(B)(i) TAXPAYERS TO WHICH SUBPARAGRAPH fixed-basepercentage shall be determined under this subparagraph if--41(c)(3)(B)(i)(I) the first taxable year in which a taxpayer had both gross receiptsand qualified RESEARCH expenses begins after December 31, 1983, or41(c)(3)(B)(i)(II)

6 There are fewer than 3 taxable years beginning after December31, 1983, and before January 1, 1989, in which the taxpayer had both gross receiptsand qualified RESEARCH (c)(3)(B)(ii) FIXED-BASE a case to which this subparagraphapplies, the fixed-base percentage is--41(c)(3)(B)(ii)(I) 3 percent for each of the taxpayer s 1st 5 taxable years beginningafter December 31, 1993, for which the taxpayer has qualified RESEARCH expenses,41(c)(3)(B)(ii)(II) in the case of the taxpayer s 6th such taxable year, 1/6 of thepercentage which the aggregate qualified RESEARCH expenses of the taxpayer for the4th and 5th such taxable years is of the aggregate gross receipts of the taxpayer forsuch years,41(c)(3)(B)(ii)(III) in the case of the taxpayer s 7th such taxable year, 1/3 of thepercentage which the aggregate qualified RESEARCH expenses of the taxpayer for the5th and 6th such taxable years is of the aggregate gross receipts of the taxpayer forsuch years,41(c)(3)(B)(ii)(IV) in the case of the taxpayer s 8th such taxable year, 1/2 of thepercentage which the aggregate qualified RESEARCH expenses of the taxpayer for the5th, 6th, and 7th such taxable years is of the aggregate gross receipts of the taxpayerfor such years,41(c)(3)(B)(ii)(V) in the case of the taxpayer s 9th such taxable year, 2/3 of thepercentage which the aggregate qualified RESEARCH expenses of the taxpayer for the5th, 6th, 7th, and 8th such taxable years is of the aggregate gross receipts of thetaxpayer for such years,41(c)(3)(B)(ii)(VI)

7 In the case of the taxpayer s 10th such taxable year, 5/6 of thepercentage which the aggregate qualified RESEARCH expenses of the taxpayer for the5th, 6th, 7th, 8th, and 9th such taxable years is of the aggregate gross receipts of thetaxpayer for such years, and41(c)(3)(B)(ii)(VII) for taxable years thereafter, the percentage which theaggregate qualified RESEARCH expenses for any 5 taxable years selected by the taxpayerfrom among the 5th through the 10th such taxable years is of the aggregate grossreceipts of the taxpayer for such selected (c)(3)(B)(iii) TREATMENT OF DE MINIMIS AMOUNTS OF GROSS RECEIPTS ANDQUALIFIED RESEARCH Secretary may prescribe regulations providingthat de minimis amounts of gross receipts and qualified RESEARCH expenses shall bedisregarded under clauses (i) and (ii).41(c)(3)(C) MAXIMUM FIXED-BASE no event shall the fixed-basepercentage exceed 16 (c)(3)(D) percentages determined under subparagraphs (A) and(B)(ii) shall be rounded to the nearest 1/100th of 1 (c)(4) ELECTION OF ALTERNATIVE INCREMENTAL (c)(4)(A) IN the election of the taxpayer, the CREDIT determined undersubsection (a)(1) shall be equal to the sum of-- 41(c)(4)(A)(i) percent of so much of the qualified RESEARCH expenses for thetaxable year as exceeds 1 percent of the average described in subsection (c)(1)(B) butdoes not exceed percent of such average,41(c)(4)(A)(ii) percent of so much of such expenses as exceeds percent ofsuch average but does not exceed 2 percent of such average, and41(c)(4)(A)(iii) percent of so much of such expenses as exceeds 2 percent ofsuch (c)(4)(B)

8 Election under this paragraph shall apply to the taxable yearfor which made and all succeeding taxable years unless revoked with the consent of (c)(5) CONSISTENT TREATMENT OF EXPENSES (c)(5)(A) IN whether the period for filing a claim forcredit or refund has expired for any taxable year taken into account in determining thefixed-base percentage, the qualified RESEARCH expenses taken into account in computingsuch percentage shall be determined on a basis consistent with the determination ofqualified RESEARCH expenses for the CREDIT (c)(5)(B) PREVENTION OF Secretary may prescribe regulations toprevent distortions in calculating a taxpayer s qualified RESEARCH expenses or gross receiptscaused by a change in accounting methods used by such taxpayer between the current yearand a year taken into account in computing such taxpayer s fixed-base (c)(6) GROSS purposes of this subsection, gross receipts for any taxableyear shall be reduced by returns and allowances made during the taxable year.

9 In the case ofa foreign corporation, there shall be taken into account only gross receipts which areeffectively connected with the conduct of a trade or business within the United States, theCommonwealth of Puerto Rico, or any possession of the United (d) QUALIFIED RESEARCH purposes of this section--41(d)(1) IN term qualified RESEARCH means RESEARCH --41(d)(1)(A) with respect to which expenditures may be treated as expenses undersection 174 ,41(d)(1)(B) which is undertaken for the purpose of discovering information--41(d)(1)(B)(i) which is technological in nature, and41(d)(1)(B)(ii) the application of which is intended to be useful in the development ofa new or improved business component of the taxpayer, and41(d)(1)(C) substantially all of the activities of which constitute elements of a processof experimentation for a purpose described in paragraph (3).

10 Such term does not include any activity described in paragraph (4).41(d)(2) TESTS TO BE APPLIED SEPARATELY TO EACH BUSINESS purposesof this subsection--41(d)(2)(A) IN (1) shall be applied separately with respect to eachbusiness component of the (d)(2)(B) BUSINESS COMPONENT term business component meansany product, process, computer software, technique, formula, or invention which is to be--41(d)(2)(B)(i) held for sale, lease, or license, or41(d)(2)(B)(ii) used by the taxpayer in a trade or business of the taxpayer. 41(d)(2)(C) SPECIAL RULE FOR PRODUCTION plant process,machinery, or technique for commercial production of a business component shall betreated as a separate business component (and not as part of the business component beingproduced).41(d)(3) PURPOSES FOR WHICH RESEARCH MAY QUALIFY FOR purposes ofparagraph (1)(C)--41(d)(3)(A) IN shall be treated as conducted for a purposedescribed in this paragraph if it relates to--41(d)(3)(A)(i) a new or improved function,41(d)(3)(A)(ii) performance, or41(d)(3)(A)(iii) reliability or (d)(3)(B) CERTAIN PURPOSES NOT shall in no event be treatedas conducted for a purpose described in this paragraph if it relates to style, taste, cosmetic,or seasonal design (d)(4) ACTIVITIES FOR WHICH CREDIT NOT term qualified RESEARCH shall not include any of the following.