Summary: Tax legislation at the end of 2015 (The PATH Act) made significant changes to the Research and Development (R&D) tax credit. This new legislation makes the R&D credit available to many small and midsized companies that had previously believed the credit out of reach to them. The credit was made permanent back to January 1, 2015 so U.S. companies can budget with confidence that the credit will be there in future years rather than periodically expiring as in the past.
New, Improved and Permanent R&D Tax Credit
Small business owners in the past often received R&D credits through business ownership that had limited, if any, actual current tax reduction. The reason for this is the limitation on usage of the credit against the Alternative Minimum Tax (AMT). Taxpayers in significant numbers found themselves paying the AMT or on the cusp of the AMT applying to their situation. In this scenario, the R&D credits generated would not reduce taxes paid much or at all since the credits could not reduce the AMT.
Major R&D Benefit in 2016 for Small Business
For tax years beginning in 2016 and forward, credits generated in those tax years by most small businesses (less than $50 million – three year average gross revenue) are allowed to reduce both the taxpayer’s regular and AMT taxes. This is a significant potential cash savings for most U.S. business owners.
R&D tax credits generated in tax years beginning prior to January 1, 2016 will continue to be limited by the AMT as in the past. Suspended credits will continue to be carried forward for up to 20 years.
Who Can Take Advantage of the R&D Tax Credit
Many businesses can take advantage of the R&D credit. Industries that benefit go beyond just technology companies. They may also include manufacturing, software, information technology, engineering, etc.
Most of the public discussion late in 2015 and early in 2016 has been about making the R&D tax credit permanent. Now is the time to reexamine whether the credit is applicable to your business in the long-term. Small and midsized business owners need to also focus on the significant added actual cash flow benefits that may be available beginning in 2016. The allowed offset of AMT liabilities can be a significant out of pocket cash savings to business owners.
DS+B partners with several R&D credit specialists. We can assist you in evaluating the cash flow benefits of doing an R&D tax credit study. Given the 2016 R&D credit changes, we envision significantly greater business interest in claiming the credit. Evaluating and arranging a necessary R&D credit study early for 2016 is recommended. For an in-depth discussion on how this may affect your business, please contact us.