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The following information originally posted in June of this year is a valuable reminder to businesses looking for ways to maximize credits at the end of 2016.
The research and development (R&D) tax credit has been around since the early ’80s and has seen its share of changes. With the signing of the PATH Act (Protecting Americans from Tax Hikes) on December 18, 2015, the credit has undergone more changes — three to be specific — and all are positive for business owners. Below are the changes that take effect beginning with the 2016 tax year.
1. Permanence: The credit is now permanent, which makes it easier to plan for and take advantage of. Businesses can build the credit into their budget and use the resulting funds for investment in other areas.
2. Alternative Minimum Tax (AMT) offset: For eligible small businesses — defined as a corporation, partnership or sole proprietorship without publicly traded stock that has average annual gross receipts of less than $50 million in the three prior tax years — the credit may now offset Alternative Minimum Tax (AMT). This benefit will allow the R&D credit to be fully utilized, especially for owners and partners of pass-through entities.
3. Payroll tax credit in lieu of R&D credit: Qualified small businesses may elect to apply a portion of its R&D credit against the 6.2% payroll tax imposed on business wage payments to employees. A qualified small business is defined as a partnership or corporation with gross receipts less than $5 million, and no gross receipts in any tax year preceding the five-year period that ends with the period of the election. The same rules apply for sole proprietors, except gross receipts include receipts from all trades or businesses.
This new election is a game changer for startup companies who may be generating R&D credits but do not have any income in the current year against which to use them. Instead of carrying forward the credits (allowable up to 20 years), qualified small businesses can now elect to apply a portion, or all, of their R&D credit towards their payroll taxes, saving the company money sooner. The payroll tax credit will be applied on the quarterly payroll tax return (Form 941), but the IRS will provide guidance on specifics at a later date.
Other aspects of the R&D credit have remained the same, including the calculation itself and definitions of qualified research expenditures and qualifying activities, as well as the four-part test gauging qualifying R&D activity (permitted purpose, technological in nature, a process of experimentation, and a level of uncertainty). Read more about qualifying for the R&D credit in our blog post “R&D Credit: Why Your Business May Qualify.”
You may be spending money on activities you didn’t even know qualify as R&D expenditures. With the credit now a permanent part of the tax planning landscape, speak with your tax advisory team to identify any qualifying activities and expenditures.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.
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