The Research & Development Tax Credit
Jill Mazur
New Changes Mean You May Now Be Able to Benefit!
T
he Research & Development Tax Credit is one of the most powerful tax incentives available to business today. It is a permanent federal tax incentive meant to stimulate innovation, technical design and manufacturing within the United States. As an added bonus, most states offer a similar tax incentive as well, including states that do not have an income tax, such as Texas. If you explored the R&D tax credit in the past, and found that you could not benefit, now may be the perfect time to explore capturing the credit as new changes mean you may now be able to benefit. The Protecting Americans from Tax Hikes (PATH) Act, was enacted to protect Americans from fraud and it extended many expiring laws. The PATH Act made several changes to the R&D tax credit, all of them are great, and benefit the taxpayer. As a result of the PATH Act, the changes to the R&D tax credit are as follows: • The tax credit became permanent. After years of expiring, the credit is now permanent. This is a wonderful change enabling American businesses, and their CPAs, to adequately plan for the future. .• Alternative Minimum Tax (AMT) was eliminated for companies with less that $50 Million in gross receipts. This is an amazing change for flow-thru entities because in the past, if an owner was in AMT, this would prevent them from taking advantage of the 70
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R&D tax credit. The change now allows these companies to use the R&D credit to reduce AMT. • Start-up companies can now take advantage of the credit. This is a HUGE change. Most start-ups are in NOLs, and therefore if they are eligible to receive the R&D tax credit, they could not take advantage of the credit as the credit offsets income tax. If there is not any income tax, the benefit cannot be used. It can be carried forward for 20 years, but there would not be any immediate benefit. Now, instead of offsetting income tax, startups can offset payroll tax. The importance of a start-up being able to benefit from the R&D tax credit cannot be overstated. Most start-ups are developing new products or processes, and they should be able to benefit from the R&D tax credit, just like established businesses. A Startup is defined as a business with less than $5 million of gross receipts for the year, and no gross receipts more than five years ago. If a company meets these two criteria, they can now use the R&D tax credit to reduce a portion of their federal payroll taxes, specifically the employer’s Social Security portion of the FICA taxes. The R&D tax credit is available to almost every American Business, and if you are not claiming this most powerful incentive, you may be leaving money on the table. Jill Mazur, CPA Director Engineered Tax Services 949-350-6369 JMazur@EngineeredTaxServices.com