Glossary

The vocabulary of specialty tax. Every term here appears throughout our guides.

ASC (Alternative Simplified Credit)

An election under Section 41(c)(4) that computes the research credit as 14% of qualified research expenses exceeding 50% of the average QREs for the three preceding tax years. The most common computation method in practice because it avoids the fixed-base percentage of the regular method.

Basis

A taxpayer's investment in property for tax purposes, used to measure depreciation, gain, and loss. Cost segregation reallocates basis among asset classes; it never creates basis.

Bonus depreciation

An additional first-year depreciation allowance under Section 168(k) for qualified property with a recovery period of 20 years or less. Restored to 100% for property acquired after January 19, 2025.

Carryforward

The portion of a credit or loss that exceeds what can be used in the current year and is carried to future years — for the research credit, back 1 year and forward 20 under Section 39. Our namesake.

Cost segregation study

An engineering-based analysis that reclassifies components of a building from 39-year (or 27.5-year) real property into 5-, 7-, and 15-year property, accelerating depreciation deductions.

Discovery test

A now-rejected interpretation requiring research to expand common knowledge in a field. Regulations confirm the Section 41 standard is discovery of information new to the taxpayer, not to the world.

Fixed-base percentage

Under the regular research credit method, the ratio of QREs to gross receipts in a historical base period (or 3% for most start-ups initially), used to compute the base amount the current-year QREs must exceed.

Form 3115

Application for Change in Accounting Method — the mechanism for adopting or changing treatment of items like depreciation or research expenditures, often with a Section 481(a) catch-up adjustment.

Form 6765

Credit for Increasing Research Activities — the form on which the federal R&D credit is computed and claimed. Substantially expanded beginning with 2024 tax years, including the new Section G business-component detail.

Four-part test

The Section 41 qualification test for research activities: permitted purpose, elimination of uncertainty, process of experimentation, and technological in nature. All four must be met at the business-component level.

MACRS

The Modified Accelerated Cost Recovery System — the default depreciation regime, assigning property to recovery periods (5, 7, 15, 27.5, 39 years) and methods (declining balance or straight line).

Partial disposition election

An election under the tangible property regulations to recognize loss on the remaining basis of a replaced building component (for example, a torn-off roof) rather than depreciating both old and new simultaneously.

Payroll tax offset

The Section 41(h) election allowing a qualified small business (under $5M gross receipts, no receipts before the 5-year window) to apply up to $500,000 of research credit against payroll taxes instead of income tax.

Prevailing wage and apprenticeship (PWA)

Labor requirements that, when met, multiply certain energy incentive amounts (like Section 179D) by five. Introduced by the Inflation Reduction Act.

QIP (Qualified improvement property)

Interior improvements to nonresidential buildings placed in service after the building. 15-year recovery period, bonus-eligible — a frequent cost segregation companion.

QRE (Qualified research expense)

The expenses that enter the research credit computation: taxable wages for qualified services, supplies consumed in research, 65% of contract research, and certain cloud computing (rental) costs.

Recapture

Income recognized on disposition of property to the extent prior depreciation exceeded what straight-line would have allowed (Section 1245) or to tax gain attributable to depreciation on real property at up to 25% (unrecaptured Section 1250 gain).

Section 41

The Internal Revenue Code provision granting the credit for increasing research activities — the federal R&D tax credit.

Section 174 / SRE expenditures

Specified research or experimental expenditures. From 2022 through 2024, all such costs (including software development) had to be capitalized and amortized over 5 years (15 for foreign research).

Section 174A

Added by the 2025 One Big Beautiful Bill Act: restores immediate deduction of domestic research or experimental expenditures for tax years beginning after 2024, with elective 60-month amortization. Foreign research remains under 15-year amortization.

Section 179D

The energy-efficient commercial buildings deduction — up to $5+ per square foot (indexed) for qualifying HVAC, lighting, and envelope efficiency, allocable by government and tax-exempt owners to designers. Terminates for property beginning construction after June 30, 2026.

Section 280C

Prevents a double benefit by requiring the deduction (or capitalized amount) for research expenses to be reduced by the credit, unless the taxpayer elects the reduced credit (historically 79% of the full amount).

Section 45L

The new energy-efficient home credit — $2,500 or $5,000 per qualifying dwelling unit for homes meeting ENERGY STAR or Zero Energy Ready standards. Terminates for homes acquired after June 30, 2026.

Section 481(a) adjustment

The cumulative catch-up adjustment that trues up income when a taxpayer changes an accounting method, taken fully in one year (if favorable) or spread over four (if unfavorable).

Straight-line depreciation

Depreciation in equal annual amounts over the recovery period — required for real property (27.5- and 39-year classes) and the reference point for measuring Section 1245 recapture.