In what has become a “holiday tradition,” Congress late last year put a bow on a tax extenders package (officially, the Protecting Americans from Tax Hikes Act, or PATH Act). The recently passed PATH Act includes changes, many of which are retroactive to the beginning of the 2015 calendar year. In an unexpected, pro-taxpayer move, several items in the 2015 package were extended for multiple years or made permanent. One of the items permanently extended was the Research and Development (R&D) Tax Credit. In addition to the credit’s permanence, there were other critical prospective enhancements that small businesses should love:
R&D credit now available to offset AMT
For years, we have worked with clients to utilize and maximize R&D credits, and one of the most difficult hurdles to clear historically has been the impact that the credit has on the Alternative Minimum Tax (AMT). Prior to 2016, the R&D credit was considered a preference item for AMT purposes. As a result, small business taxpayers that were subject to AMT saw dramatically limited or eliminated benefits, even if those taxpayers could benefit from the credit for federal tax purposes. As of 2016, the R&D credit also can be used to offset AMT liability – great news for small businesses.
R&D credit now available to offset payroll tax liability
Another change made to the R&D credit was unprecedented availability of a payroll tax liability offset. The impact of this change cannot be overstated, since many of the research and development costs incurred by small businesses occur during the start-up phase of the company, when expenses far outpace revenue. If a small startup business had losses from a federal income tax perspective, the R&D credit had nothing to offset prior to 2016. Now, the credit is also available to offset payroll taxes – in effect, the credit is now refundable as long as a taxpayer has enough payroll tax liability to absorb the credit.
What these changes mean
This information is tremendous news for small businesses. Over the years, regulations have expanded the portfolio of activities that qualify for R&D credit consideration. While these regulations created more opportunities for larger businesses, small business taxpayers continued to struggle to benefit from the credit. The two modifications above dramatically expand the applicability of the R&D credit to small business taxpayers. Now is the time to take action. Every small business taxpayer should revisit conversations about the applicability of the credit to his or her business. If you want to start the conversation, contact a related author listed below at PYA, (800) 270-9629.
