The Research & Experimentation Tax Credit, also referred to as the “R&E” or “Research” tax credit incentivizes companies to invest in people and technology that can lead to growth in revenues and profitability, as well as to promote job retention and expansion. The credit focuses on three types of expenditures: qualified wages, supply costs and contract research.
Since its inception in the 1980’s, the research credit (along with other so-called “tax extenders”) has existed on a renewable basis; usually for two years, but only for one year in 2014. This made it challenging for companies to track the eligible expenditures for the credit, since it was not known if the credit would be in place when it came time to file for it.
The Protecting Americans from Tax Hikes Act of 2015 addresses this issue. Along with other business and personal tax incentives, the Research & Experimentation Tax Credit has finally been made permanent, meaning the credit will continue to be in effect for 2015 and beyond.
Additionally, there were two significant enhancements to the credit for tax years beginning after December 31, 2015.
- Previously (except for a one-time exception in 2010), the research credit could offset “regular” tax, but not the alternative minimum tax or “AMT”. Although this does not usually affect C corporations, the owners of flow-through entities including S corporations and LLC’s often pay the AMT, and cannot utilize these credits (although they could be carried forward for up to 20 years).
The new provisions allow eligible small businesses to use research tax credits to offset both the regular tax and AMT. Generally, eligible small businesses are defined as those with average annual gross receipts of less than $50 million for the 3-year period prior to the taxable year.
Under the new regulations, a qualified small business may elect to apply the research credit as a payroll tax credit against its OASDI (social security) liability instead of its income tax liability. The research credit can offset up to $250,000 in payroll taxes.
For this purpose, a qualified small business is defined as: 1) a corporation or partnership with gross receipts of less than $5 million for the taxable year, and 2) a company with no gross receipts for any taxable year preceding the five-year taxable period ending with the taxable year.
Even though the two new provisions described above don’t take effect until next year, it is advisable to begin tracking eligible expenditures now because of the way the research credit is calculated. Learn more at our upcoming R&E Tax Credit seminars this January in Kansas City, Denver and St. Louis.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
Research & Experimentation Tax Credit Services Overview