Last year’s Protecting Americans from Tax Hikes (PATH) Act made these critical changes to the Research and Development Tax Credit (R&D Tax Credit):
- Smaller businesses (those with average gross receipts of $50 million or less over the preceding three years) can claim the credit against Alternative Minimum Tax (AMT)
- Startup businesses (those in operation for less than five years with less than $5 million in gross receipts) can offset the credit against up to $250,000 in employer-paid payroll taxes.
- The R&D tax credit is now permanent.
The federal Research and Development tax credit, (R&D credit), has been available for 35 years, but many companies fail to take advantage of its cash-flow benefits. Some companies may believe that the credit doesn’t apply to them. The R&D tax credit is not just for companies that conduct laboratory research. The R&D tax credit is potentially available to any business that invests in developing new products, improving processes or techniques, creating software, and a variety of other innovations. That change is not new. We have been working with companies to capture R&D tax credit benefits since 2004. Chortek estimates that we have saved our clients $3.2m.
What is new are the changes made by the PATH Act. Businesses that have invested resources in innovation and improvement of products and processes will have access to the benefits of the R&D tax credit.
Prior to the PATH Act, the credit could not be used to reduce AMT, now it can. Many small and medium size businesses and their owners are subject to AMT. AMT delayed or defeated the benefit of the credit. The PATH Act removed that obstacle.
Start-up businesses don’t have taxable income, but they do pay payroll taxes as they generate new jobs. The credit was of no use if a business was not generating taxable income. Now those start-up businesses can use the R&D tax credit to reduce payroll taxes.
Permanent R&D Tax Credit Strategy
Establishing the R&D credit as permanent can reduce the uncertainty companies previously faced in long-term planning. R&D credit is also increasingly more available to small and startup businesses. In light of these changes, companies that haven’t claimed R&D credits in the past should take another look at the potential benefits of this strategy.