State of Rhode Island - Division of Taxation
Ruling Request No. 95-05
Re: Request for Ruling Regarding Credit for Qualified Research Expenses
Request for Ruling
You request a declaratory ruling on behalf of your client, (taxpayer), pursuant to section 42-35-8 of the General Laws of Rhode Island relating to the application of the credit for qualified research expenses.
The taxpayer sells computer software which it develops. They have a product development department whose sole purpose is to work on new product development and enhancements to existing products. The taxpayer has a 52-53 week fiscal year which ends on the Saturday closest to December 31. During 1994 the taxpayer incurred the following costs which qualify for the Federal Section 41 credit:
The taxpayer's qualified research expenses incurred solely in Rhode Island from July 1, 1994 through December 31, 1994 were and the taxpayer's base amount, as determined for Federal income tax purposes was. The Federal form 6765 (Credit for Increasing Research Activities) Line 25 indicated that the taxpayer had Federal excess expenses of.
(a) Taxpayer requests a ruling that the term "base period research expense" be interpreted to have the same meaning as the term "base amount" found in IRC 41(c).
(b) Taxpayer requests a ruling that if its qualified Rhode Island research expenses are for a period of less than twelve (12) months, the base amount should be prorated over the same period as the period in which it generates qualified research expenses for its first fiscal year ending after July 1, 1994.
Rhode Island General Law 44-32-3, reads in pertinent part as follows:
44-32-3. Credit for qualified research expenses. -- (a) A taxpayer shall be allowed a credit against the tax imposed by chapter 11 or 30 of title 44. The amount of the credit shall be five percent (5%) of the excess (if any) of:
(1) The qualified research expenses for the taxable year, over
(2) The base period research expenses.
(b) The terms "qualified research expenses" and "base period research expenses" shall have the same meaning as defined in section 41 of the Internal Revenue Code [26 U.S.C. 41], provided, however, that such expenses shall have been incurred in this state after July 1, 1994.
* * *
As to the issue of interpretation of the term "base period research expense," section 44-32-3, above, states that the term "qualified research expenses" and "base research expenses" shall have the same meaning as defined in section 41 of the Internal Revenue Code [26 U.S.C. 41].
Current IRC Section 41 does not contain a definition of the term "base period research expense." That term was replace with the term "base amount" by the Omnibus Budget Reconciliation Act of 1989.
The credit provided by 44-32-3 was drafted to utilize the definitions in the Federal Credit under Code Section 41. As such the change in Code Section 41 made in the Omnibus Budget Reconciliation Act to refer to the "base amount" is deemed to have replaced the term "base period research expenses" for purpose of the credit for qualified research expenses under 44-32-3.
As to the second issue relating to the proration of qualified Rhode Island research expenses, 44-32-3 does not provide for proration nor is it required under the statute. The determinative factor in arriving at the appropriate credit is how much of the excess expenses were incurred in this state after July 1, 1994. That sum would be the amount to which the five percent (5%) would be applied in order to arrive at the Rhode Island expense credit.
For example, assume that (a) the taxpayer has qualified research expenses (incurred in Rhode Island) for Federal Code Section 41 credit in its current fiscal year of $100,000 and the Federal 41 base amount is $75,000, and (b) the expenses were incurred evenly throughout the year, the credit would be computed as follows:
|Qualified Research Expense||$100,000||$100,000||$100,000
|Federal Excess Expense||$25,000||$25,000||$25,000
|Amount incurred in RI after 7/1/94||$25,000||6,250||12,500
|[1 year]||[3 mos.]||[6 mos.]
|RI R & D Credit @ 5%||$1,250||$313||$625
If however, the taxpayer has qualified research expenses for Federal Code Section 41 credit in its current calendar year of $100,000 and the Federal Code Section 41 base amount is $75,000 and the excess expenses were incurred in case #1 below, all in March and April and, in case #2 below, all in November in the credit would be computed as follows:
|Case #1||Case #2
|Qualified Research Expenses||$100,000||$100,000
|Federal Excess Expense||$25,000||$25,000
|Amount of Federal Excess Expenses Incurred in RI||25,000||25,000
|Amount of RI Expenses Incurred after 7/1/94||0||25,000
|Credit @ 5%||$ 0||$ 1,250
(a) For purposes of the credit provided by 44-32-3, the term "base period research expense" has the same meaning as the term "base amount" pursuant to IRC Code Section 41(c).
(b) If a taxpayer's qualified Rhode Island research expenses are for a period of less than twelve (12) months the applicable credit is arrived at by determining how much of the qualified Rhode Island research expenses were incurred in this state after July 1, 1994.
This ruling may be relied upon by the taxpayer and shall be valid until expressly revoked or until the applicable statutory provisions are amended in a manner requiring a different result or until the underlying factual presentation changes.
R. Gary Clark
September 19, 1995