On December 18, Congress passed and the President signed into law a bipartisan, bicameral agreement on tax extenders—i.e., the 50 or so temporary tax provisions that are routinely extended by Congress on a one- or two-year basis—and numerous other tax provisions in the “Protecting Americans from Tax Hikes (PATH) Act of 2015.” The Act retroactively and permanently extends the Research and Experimentation Tax Credit, (R&E), enabling U.S. companies to begin planning now for future research expenditures and tax credits. The R&E credit allows businesses that engage in certain research activities to lower their overall tax burden. Since 1981, this credit has expired and been renewed 16 times, making it one of the most unstable parts of the tax code.
AMT Tax Offset for R&E Credits Determined in 2016
PATH allows R&E credits determined for tax years beginning after December 31, 2015 to offset alternative minimum tax (AMT). Under the prior rules, small businesses were limited on using the research credit to offset AMT. Businesses limited in utilizing their investment in R&E were the businesses who could benefit most from taking advantage of the credit. This significant barrier is removed by PATH.
FICA Tax Offset for R&E Credits Determined in 2016
Eligible small businesses (gross receipts less than $5M) may elect to offset FICA taxes up to $250,000 per year with R&E credits. Under prior law, businesses were limited in recognizing the benefit of their research credit by their taxable income. This limitation negatively impacted many start-up companies who invested in research and development, however had little to no taxable income in the early years. The FICA tax offset is an incentive for start-ups to invest in research and not wait years to receive the benefit of the research credit.
If you have questions regarding the R&E Tax Credit, please call Cheryl at 513-241-8313 or click here to contact us. We look forward to speaking with you soon!