R&D Tax Credit for Design Expenses Rejected

In a new Tax Court case, Max, TC Memo 2021-37, 3/29/71, a clothing manufacturer could not claim the R&D tax credit for its process of designing garments.

Generally, the R&D credit is equal to 20 percent of the amount of qualified research expenses for the year above a base amount. The base amount is a percentage (not to exceed 16 percent) of average annual receipts for the prior four years. In no case, however, can the credit amount to less than 50 percent of the annual qualified research expenses.

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Alternatively, a business may elect to use a “simplified credit” based on 14 percent of the amount by which qualified expenses exceed 50 percent of the average for the three previous tax years.

To qualify for the R&D credit, a business must meet the following four requirements:

1. The purpose of a project must be related to creating a new or improving an existing business component.