Changes to Research and Development Tax Credit Expands Opportunities

Changes to Research and Development Tax Credit Expands Opportunities

On December 18, 2015, the Protecting Americans from Tax Hikes (PATH) Act was enacted, extending many important tax credits, and making a lot of them permanent. One of the areas in which these changes have the potential to enhance business startup activity is in the Research and Development (R&D) tax credit. Here are the changes that were made to the R&D tax credit under the PATH Act:

The R&D Credit was Made Permanent

For many years, businesses had to wait until the final hours before Congress recessed for Christmas break to find out if the R&D tax credit was still in effect for that particular tax year. At the end of every negotiation, this credit was deemed important enough to retain and extend for certain periods of time. In fact, since its inception in 1981, the R&D credit has been extended a total of 15 times. The obvious problem with these last-minute extensions is the uncertainty it brings. For example, the most recent R&D credit expiration date was December 31, 2014. Though it was made permanent and in effect retroactive to its most recent expiration date under the PATH Act, businesses did not know it would work out this way until 2015 was almost over. Now that the R&D credit is permanent, there is no longer any uncertainty around end-of-year deadlines. This means qualifying U.S. businesses now know for sure they can take advantage of the benefits of this credit (and are able to plan accordingly).

Small Businesses Can Use the Credit as an Alternative Minimum Tax (AMT) Offset

Sole proprietorships, partnerships and private corporations with gross receipts not exceeding $50 million for the three most recent tax years can now count the R&D credit against their Alternative Minimum Tax. This change opens the door for thousands of small businesses that would have qualified for the credit in the past, but were barred because of the AMT, to finally take advantage of it.

tax credit PATHCertain Businesses Can Use the R&D Credit as a Payroll Tax Offset

Many startup businesses struggle to earn income during their first couple years in business. This is particularly true of companies that do extensive research before bringing a product to market. For this reason, many of the nation’s most innovate companies were previously unable to benefit from the R&D credit, because it only counted against their federal income tax. Under the PATH Act, qualifying small businesses can now take the credit against their payroll (FICA) taxes for up to their first five years in business. This change alone has the potential to unleash massive pent-up innovation from startups that are now able to invest in important research and take advantage of the R&D credit. The PATH Act provided many positive developments for businesses that want to minimize their tax liability. For further information on how the R&D credit or any other PATH Act changes may impact your business, speak to your local accounting firm.

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