We’re ringing in the New Year with more good tax news. Congress has permanently extended the research and development (R&D) tax credit, retroactively as of January 1, 2015. Get excited.
What’s the R&D Tax Credit?
The intent of the R&D tax credit is to encourage and incentivize businesses to conduct qualified research and development (hence, its name). Thanks to the PATH (Protecting Americans from Tax Hikes) Act of 2015, which was signed into law by the President on December 18, it’s now a permanent piece of tax law.
Why is its permanency a big deal?
This story starts long ago, when the R&D tax credit was first enacted as a temporary credit in 1981. Since that time, the credit has remained temporary and has expired 16 times. The R&D tax credit is great for supporting business, but its continual uncertainty has rained on a lot of people’s parades.
So it’s looking sunny from here?
Pretty much. The now certain future of the R&D tax credit is considered a big win for businesses who are investing in research and development. Further, the legislation gave another gift and broadened the impact of the credit for many small to mid-sized businesses.
Under the previous rules, the R&D tax credit was only used to offset regular tax, which limited many small to mid-size businesses from using the credit. The reason? A number of small to mid-sized businesses are subject to alternative minimum tax.
Alternative minimum tax (AMT) is a tax system that limits certain tax benefits for taxpayers with high income in order to make sure that those taxpayers pay at least a minimum amount of tax.
However, as of January 1, 2016, “Eligible Small Businesses” will be able to use the R&D tax credit to offset AMT. So what exactly constitutes an “eligible small business”? Well, it’s a business with less than $50 million in average gross receipts for the three preceding years.
But wait, that’s not all. There’s also a “Qualified Small Businesses” provision for those businesses with less than $5 million in annual gross receipts and having gross receipts for no more than five years. These “qualified” small businesses can use the R&D Tax credit to offset the FICA employer portion of payroll tax, capped at $250,000 for each eligible year.
Confused? Trust us, this is a good thing, especially for start-ups. These new provisions will allow you to use the credits now, instead of waiting until you are able to generate taxable income. This could result in more immediate cash benefits for many companies.