Global Tax Insights
2015 Tax Extender Bill Updates, Clarifies & Expands R&D Tax CreditsJanuary 06, 2016
The long awaited extension of the research and development tax credit has been signed into law by the president.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 contains several important updates related to the Research and Development (R&D) tax credit.
Highlights of the bill
Historically, the R&D Tax Credit has expired and then been temporarily restored, which has greatly limited its usefulness for businesses. The point of the credit is to act as an incentive to spend money on researching and developing new products, processes and implementing new technologies. However, this hasn’t been possible for many businesses to do this because of the frequent expiration and temporary restoration through the years.
The PATH Act expands the use of and finally gives some certainty to the R&D credit.
The following provisions for 2016 will be implemented:
- The R&D credit will now be a permanent part of the federal tax code.
- Owners of small businesses with less than $50 million in gross receipts may claim the credit to reduce their alternative minimum tax (AMT) liability incurred on their individual tax returns. This expansion is effective for tax years beginning after December 31, 2015.
- Additionally, for tax years beginning after December 31, 2015, research credits can be used to offset employer payroll and FICA taxes for certain start-ups (gross receipts totaling less than $5 million). Utilizing the credit against payroll is capped at $250,000 per year, and can be claimed for up to five years. In the past, it has been very difficult for emerging, innovative companies to benefit from the credit. This new “startup provision” will be very beneficial for new businesses.
PATH will finally get rid of the uncertainty as to whether the credit would be extended again after previous extensions lapsed. Beginning in 2016 there will be many opportunities for start-up companies to take advantage of the credit and reduce their overall cash outflow for taxes. This is a big deal for cash strapped startups. With more and more tax payers subject to the AMT every year, PATH will now allow them to reduce their AMT tax liability through use of the credit. This will leave more cash in their pockets to possibly expand their operations.
Things to consider
- There are no changes to the alternative simplified credit calculation as many had anticipated, unfortunately.
- In addition to this, shareholders who have AMT issues will not be able to benefit from the R&D credit until their 2016 tax returns are filed.
- Also, the PATH Act does not modify calculation methods proposed in prior legislation, which aimed to eliminate the Traditional credit method and increase the Alternative Simplified Credit (ASC) percentage from 14% to 20%.
Questions? Contact any member of our Tax Services Team.