Your Business May Benefit from the Research Tax Credit
Legislation in late 2015, made the Research Tax Credit permanent and not part of the federal tax provisions that were commonly referred to the “extender provisions”.
Basics of the Credit
We are not going to get into many of the specifics of the Research Tax Credit here, but rather just provide you with a quick overview.
Sometimes referred to the Research and Experimentation Tax Credit, this credit can apply to many businesses and industries. It doesn’t require that you have lab and conduct scientific experiments. Many businesses have processes whereby they are modifying and improving existing products and processes and assuming the risk of failure if the improvement is not achieved. While not all businesses are eligible for the credit, it is worth a quick analysis to determine if it does apply and is cost effective to calculate and take the credit. Also, many states have research credits that can be sold to other taxpayers thus, providing the business with a source of capital if the tax credit is not of value to the business. Along these lines, the federal research tax credit may be used in certain situations to offset payroll tax liabilities. This is a big change that can benefit companies, especially those in the startup phase.
The statutory rules for the research tax credit essentially provided for a credit equal to the sum of (1) 20% of the excess of the “qualified research expenses” (QREs) over the greater of (a) 50% of the QREs or (b) an amount based on a formula that takes account of the QREs and gross receipts in certain earlier tax years, (2) 20% of the excess of research payments paid to certain outside organizations over an amount calculated under a complex formula, and (3) 20% of amounts paid or incurred to an energy research consortium for energy research.
The legislation that made the research tax credit permanent also added two features that are especially favorable to small business. First, it provides that beginning in 2016 eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability. Also, beginning in 2016, the new law provides that the credit can be used by certain even smaller businesses against the employer’s portion of the Social Security portion of the employer’s payroll tax (i.e., FICA) liability.
The federal research tax credit is now permanent.
Many businesses may not realize that the research credit can be applicable to their business.
Recent legislation allows the credit to be used to offset payroll taxes in certain situations.
Many states offer a research tax credit, some of which can be sold to other taxpayers.
Utilize tax professionals specializing in the research tax credit to determine if your business qualifies and if the process will be cost effective.
Businesses subject to AMT are no longer limited in their utilization of the tax credit.
As we always advise, seek a qualified tax professional to explain and determine if the research tax credit applies to your business.