The tax deal instituted by Congress at the end of 2015 makes the R & D tax credit permanent. This deal also includes two crucial changes to the R & D tax credit which provide a vital benefit to innovative small businesses, especially startups. Business owners need to examine these changes closely.
First, the legislation permits small businesses to take the credit against their AMT (the AMT turnoff). Secondly, the bill permits small businesses to take the R & D tax credit against their payroll taxes for five years—which basically makes the credit refundable.
What makes these changes so critical?
AMT Turnoff—Thousands of CPA firms across the nation constantly observe small businesses doing work that qualifies for the R & D tax credit. However, these businesses are effectively barred from using the credit due to the AMT limitations which have been in place.
The AMT turnoff was established in 2010 for one year by Congress thanks in large part to the efforts of Senator Grassley (R-IA). The upside for that year was hugely significant for small businesses, who could finally take advantage of the substantial tax savings created by the R & D tax credit. Since that time, Chairman of the Ways and Means Committee Brady (R-TX) has been a vocal advocate of the AMT turnoff in the House. Senators Roberts (R-KS) and Schumer (D-NY), along with Grassley, were also instrumental in getting this commonsense law reinstalled. The AMT turnoff applies to businesses with less than 50 million in gross receipts, and it paves the way for countless small businesses to benefit at last from the R & D tax credit.
Start-Up—One of the most frustrating quirks of the R & D tax credit is that this country’s most cutting edge, innovative companies often cannot take advantage of the credit because they are just opening their doors, do not have any income and aren’t paying federal income taxes (although incurring payroll taxes).
The Start-Up Act—Spearheaded by Senator Coons (D-DE), with help from Senators Roberts and Schumer—enables small businesses to take the credit against payroll taxes (to a maximum of $250,000 per year) for up to five years. For the Start-Up Act provision, a small business is generally defined as one with yearly gross receipts of less than five million dollars.
In the few states that have had an R & D tax credit that is refundable, such a credit has instantly led to keeping companies solvent while generating new jobs and new business.
It is imperative though that small business owners ensure that they do not self-censor when ascertaining whether their company may possibly qualify for the R & D tax credit with its vital new changes. Bear in mind—The R & D tax credit pertains to an enormous amount of work in the economy, in basic research and applied research, in fields including software, engineering, architecture, agriculture, biology, chemistry, pharmaceuticals and many more. While there are definitely still some intricacies in the details in qualifying for the R & D tax credit, Congress has withdrawn two substantial impediments for small businesses and start-ups with these important reforms. This legislation provides a helpful stimulus for entrepreneurs and small business owners to begin 2016.