Leonard M. Friedman, CPA/ABV, CBA

July 27, 2016

The New and Improved Research and Development Credit

In December 2015, the President signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015. The law contained many extensions of various tax credits, and amongst them was the Research and Development (R&D) tax credit which was extended indefinitely.  This credit, although historically renewed every year, was always on the fence of being repealed or more limited than it already was.

Prior to 2016, this credit was very limited in its usability to business owners whose pass-through entities (Partnerships and S Corporations) generated R&D credits to be used on their personal returns. The credit was limited and not allowed to reduce Alternative Minimum Taxes (AMT), so if the owners’ ordinary income was between $200,000 and $700,000 there was a good chance that this credit was not used and had to be carried over to future years.  Credits carried over from years prior to 2016 will still be under the same limitations going forward. HOWEVER….

For Companies with less that $50 million in average revenues, the credits calculated for years beginning January 1, 2016 or later are no longer limited by the AMT. This is extraordinary news for small business owners who are constantly modifying their products such as software, chemicals, consumer products, engineered products, machine designs, etc., and have always been limited in the use of the credit on their personal returns.  This rule is also available for Companies that operate as C Corporations.  C Corporations companies historically have not been as limited as individuals because the AMT is a much higher threshold and was more usable against corporate taxes. EVEN BETTER YET…….

For small start –up technology entities (businesses with less than $5 million in annual gross receipts and having gross receipts for no more than five years,) who have losses and have no immediate use for the R&D credit, will now under certain situations be able to use the R&D tax credit to offset the employer FICA portion of payroll taxes up to $250,000.

The R&D credit is detailed and complex and requires good record keeping. Please contact us if you need help determining if you qualify for use.