Posted by on 04.15.16
A misconception has long been held that research and development (R&D) tax credits are reserved for scientists, medical researchers and others wearing white lab coats. The situation was further muddied by the fact that the tax credit program was temporary— hastily extended more than a dozen times since its passage in 1981. As a result, businesses in many industries have missed out on thousands – even tens of thousands – of dollars in money-saving opportunities each year.
The permanent extension of the R&D credit is a great wake-up call for those in industries ranging from manufacturing, construction and software development to aerospace, high tech and biopharmaceuticals – among others – to sit up and take notice of their eligibility to apply for the tax credits.
Think of it this way—the intent behind the R&D tax credit program is to encourage innovation in the U.S.; the type of entity itself doesn’t matter as much. A job shop fabricating metal parts is just as likely to qualify as a scientist in a medical lab. The U.S. Tax Court and other courts have ruled in favor of activities that make things faster, better, greener and more efficient. This applies to the contractor who has used innovative construction materials to create more reliable, energy-efficient structures and the manufacturer who has used new technology to improve the efficiency of a production process.
As we described in past blogs, the two changes Congress made in approving the PATH Act expands the tax credit playing field in favor of smaller companies in the following ways:
1) Payroll Tax Offset
The enactment of PATH enables startups, as well as some established small businesses that develop and test new products, to qualify for the R&D Tax Credit. Before, a company had to generate a profit and pay income taxes before it could claim the credit. Now, businesses with less than $5 million in revenue a year can take the tax credit against their payroll taxes, assuming they had employees engaged in research and development within their first five years in business. The maximum benefit an eligible company is allowed to claim against payroll taxes each year under the new law is $250,000. The new payroll tax offset is limited to companies that have: • Gross receipts for five years or less; a company is ineligible if it generates gross receipts prior to 2012 • Less than $5 million in gross receipts in 2016, and for each subsequent year the credit is elected • Qualifying research activities and expenditures
2) Alternative Minimum Tax (AMT)
PATH also included a new provision to make it possible for those companies with $50 million and less in gross receipts, based on a three-year average, to apply the R&D tax credit against the AMT. This is big news for shareholders of qualifying pass-through entities, such as S corporations and partnerships that have an AMT liability. There are carry-forward and carry-back guidelines that give the taxpayer some flexibility about when to apply the offset. The new AMT provision is effective January 1, 2016 and later.
Find Out if Your Industry Qualifies
The R&D credit can be a lucrative incentive for innovative businesses. Given these changes and the new permanent nature of the tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving tax credit opportunities. Consider making the R&D tax credit part of your long-term strategic planning and make sure you’re not leaving money you’ve earned on the table. To learn more about whether your industry and company activities qualify for the R&D Tax Credit, request our free assessment today.
Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, call us at (800) 260-4138 or please leave us a message below.