In an effort to help US companies maintain their technological competitiveness, Congress instituted the Research & Experimentation credit (known today as the Research & Development credit) as part of the Economic Recovery Tax Act of 1981. Throughout its storied history the R&E (R&D) credit has expired eight times and been extended fifteen times. Because of this uncertainty, companies were unable to count on the credit’s presence in future tax years and plan accordingly. Finally, Congress made the R&D tax credit permanent with the enactment of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act).
With the R&D Credit, companies can realize a net benefit based on a percentage of qualified annual research expenditures that exceed a base amount. If you qualify, this benefit is a dollar-for-dollar credit against your tax liability. In addition to the federal R&D tax credit, approximately 40 states have R&D tax credits that largely mirror the federal equivalent. Many companies fail to realize the full benefit available to them under the state and federal R&D tax credits due to the complexity of its application. Claiming the credit requires an understanding of the full range of activities and expenses that qualify and of the necessary supporting documentation to sustain the credits under IRS or state examinations.
In addition to making the R&D credit permanent, the PATH Act provided two key benefits to eligible small businesses for taxable years beginning on or after January 1, 2016. First, businesses with gross receipts under a $5 million threshold, along with other revenue requirements, are able to use the R&D credit to offset payroll taxes up to $250,000 per year. This benefit is available to corporations (including S corporations), partnerships, and individuals, but is not available to organizations exempt from tax under section 501. Second, businesses with average annual gross receipts less than $50 million may now offset both regular tax and alternative minimum tax (AMT) with R&D tax credits. This benefit is only available to businesses that are a corporation whose stock is not publicly traded, a partnership, or a sole proprietorship. In addition, the business’s average annual gross receipts cannot have met or exceeded the $50 million threshold in the past three years.
You may be eligible for the R&D credit if you engage in any of the following activities:
- Developing new products
- Improving existing products
- Developing new or improved manufacturing or production processes
- Developing new production equipment
- Attempting to use new materials
- Designing and fabricating tools and dies
- Developing certain types of software
Please contact Global Law PLLC with any questions, or for a consultation to see if your company is eligible for the R&D tax credit!Please share:
- 15 Feb, 2017
- Natasha Ramirez
- 0 Comments
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