Research and Development Credit Made Permanent: New AMT and Payroll Tax Provisions

Research and Development Credit Made Permanent: New AMT and Payroll Tax Provisions

Research and Development Credit Made Permanent: New AMT and Payroll Tax Provisions

On Friday, December 18th,  2016, the US Senate passed an Omnibus bill that included the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), H.R. 2029. A few hours later, President Obama signed the bill into law. This officially makes the Credit for Increasing Research Activities (The R&D Credit) permanent for the first time. This is a major boon for US companies since the United States was one of the last western countries without a permanent R&D tax credit.

The PATH Act is a part of House Amendment #2 to the Senate Amendment to H.R. 2029. Section 121 of this amendment contains several modifications to the R&D Credit.

First, and perhaps most importantly, Section 121(a) modifies IRC section 41 to make the credit permanent. Since 1981, when the R&D credit was first enacted, it has always been a temporary credit. Congress has always just renewed the credit every one or two years when it expired. This provision finally changes that. However, making the credit permanent was not the only big change.

Section 121 (b) goes on to state that IRC 38(c) (4)(B) is amended to allow eligible small businesses to use the R&D Credit against Alternative Minimum Tax (AMT). This means that many companies that previously had no utilization for the R&D Credit will suddenly find it available to them. This will provide an economic boost to many companies in the fabrication, manufacturing, engineering, and science industries. The test for eligible small businesses for this provision will be the test set out in IRC 38(c)(5)(C) which includes closely held corporations, partnerships, and sole proprietorships if the average annual gross receipts for the three preceding tax years do not exceed $50,000,000, along with caveats from a couple of other tax provisions. Previously, this provision only applied to the 2010 tax year, but the amendment makes it applicable in perpetuity. This opens up eligibility to take the R&D tax credit to a lot of companies that previously couldn’t because their shareholders were paying AMT.

Another major change is that qualified small businesses will be allowed to elect to use the credit against payroll taxes. Section 121(c) of the bill adds a new section to IRC 41 stating that qualified small businesses will be able to elect to use part of the current-year credit, all of the current-year credit, or even a carryforward credit against payroll tax. This will allow smaller businesses that may not have a lot of regular income tax liability to still take advantage of the R&D credit benefit. It is important to note here that a qualified small business is not the same as an eligible small business in the previous paragraph.

While the provisions relating to AMT refer to IRC 38(c)(5)(C) for rules on eligible small businesses, the definition of a qualified small business for purposes of this subsection will be given in the new IRC 41(h)(3) section. A qualified small business will be defined as “(I) a corporation or partnership, if the gross receipts … of such entity for the taxable year is less than $5,000,000, and (II) such entity did not have gross receipts (as so determined) for any taxable year preceding the 5-taxable-year period ending with such taxable year…” or a “person” if that person meets the requirements set out above and “only taking into account the aggregate gross receipts received by such person in carrying on all trades or businesses of such person.” In short, this provision is designed to help companies that, typically, have been active for less than six years with gross receipts under 5 million to be allowed to take the R&D credit even if they don’t have any income tax liability yet. There are other provisions relating to the use of this credit against FICA and limitations on the number of years it can be taken but, in general, this will help smaller, startup companies get off the ground by giving them a break on payroll taxes through the R&D credit.

The provision making the R&D credit permanent will be retroactive, going into effect as of December 31st 2014. The effective dates of the other provisions will be December 31st, 2015, meaning calendar year companies will be able to take advantage of the new AMT and payroll tax provisions starting on or after their 2016 tax year.

Although the PATH Act did not actually change the calculation of the R&D Credit, it will make a huge impact on the value of the credit. By making the credit permanent, the R&D Credit will become a benefit that companies can reliably count on for years to come. By eliminating AMT for smaller companies and allowing the credit to be taken against payroll tax by small startups, Congress has significantly increased the number of businesses that will be able to benefit. All in all, this decision is a huge win for American business.

For more information about how the PATH Act can help minimize your company’s tax liability contact HIREtech at 844.HIREtec.

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