Expenditures made for research and development purposes must be allowable under the provisions of the federal internal revenue code of 1986.
The Internal Revenue Code defines qualified research expenditures as those expenses for activities intended to discover information that eliminates uncertainty concerning the development or improvement of a product. Product is a process, technique, formula or invention.
Several types of expenditures are not allowed:
The credit is 6.5 percent of the difference between the actual qualified research and development expenses for the year and the average of the actual expenditures made during the year and the two previous tax years.
The credit allowed in any one tax year is limited to 25 percent of the credit plus any carry forward. Any remaining unused credit may be carried forward in 25 percent increments until the total amount of credit is used.