R&D Tax Credit: Benefiting Small Businesses

Happy New Year! Today we bring you good news for your 2016 tax return. Yes, we’re still talking about last year … all the way up until you file those tax forms.

One of the ways your company can potentially save is through the use of the research and development (R&D) tax credit (here’s your refresh). R&D tax credits were made permanent at the end of 2015, thanks to the Protecting Americans from Tax Hikes Act (PATH) and went into effect in 2016. Included in the PATH act were some significant enhancements.

What does this mean for you? Many small to mid-sized businesses are now able to take advantage of the R&D Tax credit for the first time. Get excited.

What kind of enhancements are we talking about?

One of the big deals related to the PATH Act’s enhancements is eligibility for small business.

For the purpose of this act, small businesses are less than $50 million in average gross receipts for the three prior years.

Prior to the PATH Act, R&D tax credits were only used against regular tax. Basically this was a hindrance for small to mid-sized businesses. Why?  Small to mid-sized businesses are often subject to alternative minimum tax (AMT).

As a reminder, AMT is a tax system that limits certain tax benefits taxpayers receive in order to ensure they pay at least a minimum amount of tax. Now, however, R&D tax credits can be used to offset AMT as well.

Anything else?

Yes! There was another enhancement introduced related to “qualified small businesses.” These are businesses with less than $5 million in annual gross receipts and that have had gross receipts for no more than five years.

Why does this matter? Well these particular small businesses will now be able to use R&D tax credits to offset the FICA employer portion of payroll tax, up to $250,000 per eligible year.

There are specific stipulations about how a qualified small business goes about doing this. For more specifics, contact your tax professional or you can always reach out to us!

The moral of the story

This is a big deal, especially for smaller organizations and startups, as you’ll no longer have to wait until you’ve generated taxable income to take advantage of the savings.

If you think your organization may qualify, or if you have questions, feel free to ask. We’re always here to help.

A version of this post first appeared on EideBailly.com.

 

 

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