PATH Act Makes R&D Tax Credits More Attractive than Ever to Small Businesses and Start-Ups

February 9, 2016 by J.D. Lewis

One of the most talked about changes within the recently passed Protecting Americans from Tax Hikes (PATH) Act is that it makes the Federal Research and Development (R&D) tax credit permanent. A permanent credit allows companies to better plan for research and development investments throughout the year. In addition to the permanency provision, the Act also contains favorable changes for start-ups and small businesses that wish to claim the R&D tax credit.

AMT Limitation Removed for Small Businesses

Eligible small businesses (defined as those with $50 million or less in average annual gross receipts for the three preceding years) may now claim the R&D tax credit against the alternative minimum tax (AMT) for tax years beginning after December 31, 2015. The AMT limitation has always been one of the largest hurdles preventing certain small businesses from claiming the R&D Tax Credit. This move is not without precedent. In 2010 Congress experimented by lifting the AMT limitation for one year – a move that was met with open arms by those in the small business community. Each year since, the limitation has remained in place, serving as a barrier for small businesses.

Ability to Offset Payroll for Start-Ups

Eligible startup companies (defined as those earning revenue for less than five years and having less than $5 million in annual gross receipts) may now utilize up to $250,000 of the R&D tax credit to offset the company’s payroll tax. This provision is also effective for tax years beginning after December 31, 2015. Many companies at the forefront of U.S. based innovation have historically been unable to benefit from the R&D Tax Credit because the company is in its infancy and not yet profitable. This move to permanency helps solidify the original legislative intent of the R&D Tax Credit, which is to spur U.S. based investment in innovation and design.

We Can Help

Taxpayers who were not able to fully utilize the R&D tax credit in the past should reassess their eligibility for the credit. If you have questions, please contact your Elliott Davis Decosimo tax advisor or contact us at elliottdavis@elliottdavis.com.

Printable Version