Many popular tax credits and deductions for businesses have an unstable history, with periodic expirations and last-minute extensions that make tax planning unpredictable from year to year. A prime example of this phenomenon is the Research and Development (R&D) tax credit. This credit is calculated based on a company’s qualified research expenditures.
For more than three decades, the R&D credit was temporary, being renewed (often retroactively) or extended for another year according to the whims of Congress. All of that changed, however, last December when the Protecting Americans from Tax Hikes Act of 2015 became law and permanently established the R&D credit as a tax planning option for eligible businesses. Additionally, Congress removed limitations that previously excluded small or midsized companies from using the R&D credit.
This means that whether your company develops cleaning products or manufactures welding cable, there is now an expanded opportunity for all businesses to take advantage of this tax credit for new product development, product improvements and process improvements.
R&D credit: permanent and expanded
Statistics show that more than $7.5 billion worth of R&D tax credits are claimed each year, but billions are left on the table thanks to previous eligibility limits or misconceptions about the credit’s applicability. Think your company is too small or too new to take advantage of the R&D credit? Think again. Thanks to the PATH Act, more businesses than ever are now able to take advantage of this tax credit.
Previously, use of the R&D credit was limited if a company or its shareholders were subject to the alternative minimum tax (AMT). In such cases, the credit would be limited or would have to be carried forward. The PATH Act addressed this issue by removing the AMT limitation for small businesses. Small businesses (defined by the PATH Act as having an average of less than $50 million in gross receipts over the prior three years) are now permitted to use the R&D credit to offset AMT liabilities.
Additionally, the R&D tax credit is now immediately impactful for start-up companies, defined by the PATH Act as companies with less than $5 million in gross receipts and no more than five years of gross receipts. These qualified entities can now apply the credit against the Federal Insurance Contributions Act (FICA) portion of their payroll taxes up to $250,000.
How can the R&D credit benefit my company?
For businesses who were previously ineligible or could not reliably plan to use the R&D credit, now is the time to revisit this option. Any company working to stay competitive in today’s fast-changing economy is likely developing ways to innovate and improve its products, so let RKL help you determine whether any of those costs can be used dollar for dollar against your tax liability.
For more information on the R&D tax credit or to conduct a study to find out if it’s right for your business, contact Clint M. Rider, CPA, Partner in RKL’s Small Business Services Group at 717.394.5666.
Contributed by Debra A. Taylor, CPA, Manager in RKL’s Tax Services Group. Deb has more than 29 years in tax services specializing in individuals, estates, trusts and small businesses.