Posted by Jeffrey M. Feingold on 05.13.16
In enacting the Protecting Americans from Tax Hikes (PATH) Act of 2015, Congress not only made federal research and development tax credits permanent, members also added a provision that benefits those who pay the Alternative Minimum Tax (AMT). The new legislation broadens the impact of the credit for many small-to-midsize businesses by making the R&D tax credit available to many innovative businesses that previously couldn’t take advantage of the credit because their shareholders were paying AMT.
Previously, many businesses decided not to bother calculating R&D tax credits because they were unable to utilize them. Through the passage of the PATH Act by Congress, many companies that previously could not utilize the R&D credit can now do so and will be eligible to use this as a valid tax planning strategy in future years. This addition is a great boost for companies in the manufacturing, fabrication, engineering and science industries.
The PATH Act 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. More specifically, eligible small business (ESB) with respect to any tax year (1) is a corporation (of which the stock is not publicly traded) and (2) has average annual gross receipts of the corporation, partnership or sole proprietorship for the three tax years preceding the tax year that do not exceed $50 million. 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.
The ability to offset the credit against AMT removes a major obstacle associated with utilization of R&D credits, particularly for owners or members of pass-through entities. Although the calculation of the R&D tax credit remains unchanged under PATH, it will make a significant impact on the value of the credit. By making the R&D tax credit permanent, businesses will be able to count on it for years to come. By eliminating AMT for smaller businesses, Congress greatly expanded the number of qualified businesses that can benefit. Your accountant or qualified R&D tax credit expert can easily help you determine whether your business and activities meet the criteria of the test by conducting a tax credit study.
The R&D credit can be a lucrative incentive for innovative businesses. Given 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. To learn more about whether your industry and company activities meet the R&D four-part test, 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, please contact 1 (800) 260-4138 or please leave us a message below.