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Focus on R&E Tax Credits: Research Credit Enhancements Provide New Opportunities

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Has your company considered claiming the Research and Experimentation (R&E) tax credit, only to be told you couldn’t because of the Alternative Minimum Tax (AMT)? If so, recent federal tax law changes for small business owners make it worthwhile to take a fresh look at the R&E credit.
November 10, 2016

Has your company considered claiming the Research and Experimentation (R&E) tax credit, only to be told you couldn’t because of the Alternative Minimum Tax (AMT)? If so, recent federal tax law changes for small business owners make it worthwhile to take a fresh look at the R&E credit.

What is the R&E Tax Credit?
The R&E credit, also known as the R&D credit or the research credit, is a federal tax credit that can be claimed by companies involved in the development and/or improvement of products, processes, formulas, techniques, inventions and software. The credit focuses on qualified wages, supply costs and contract research.

What is AMT?
The AMT is a parallel tax system that all taxpayers must calculate when filing their tax returns each year. AMT legislation was enacted in the late 1960s to ensure that ‘high income’ taxpayers paid a minimum amount of tax. Unfortunately, millions of Americans that were never originally intended to be affected by AMT are hit each year with an AMT liability, largely because not all of the AMT computations have been adjusted for inflation.

Why do so many small business owners pay AMT?
Most small businesses today are structured as ‘pass-through’ entities, such as S Corporations, LLCs and partnerships. Income tax is not paid at the company level, but is passed through to the individual owners of the company. Because of the differences between the two systems in calculating taxable income, exemption amounts and tax rates, taxpayers that make between $200,000 and $750,000, including income passed through from a business, are most likely to pay AMT.

What has changed with the research credit in regards to AMT?
The R&E tax credit has been around for decades, but until this year (except for 2010), could only be used to reduce ‘regular’ tax and not AMT. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) changed this provision.

Starting in 2016, the R&E credit can be used to reduce both ‘regular’ tax and AMT for “eligible small businesses”. Generally, these companies are defined as having average annual gross receipts of less than $50 million. Small business owners who may have been able to generate research credits in the past, but because of AMT, were unable to utilize the credit to lower their tax liability can now do so.

If you have any questions about what activities qualify for the research credit, changes from the PATH Act or AMT, contact your RubinBrown advisor.

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

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