The PATH Act made three significant changes to Section 41 of the R&D tax credit statute. First, the R&D credit was made permanent. This allows companies to plan for the lucrative incentive annually. Secondly, Qualified Small Businesses (QSB) may utilize the R&D credit to offset a portion of the payroll taxes. A QSB is a corporation, partnership, or individual with less than $5 million of gross receipts during the tax year, AND the taxpayer did not have gross receipts for any tax year before the fifth tax year ending with the year of the claim. For example, taxpayers claiming the credit on their 2023 tax returns must have less than $5 million in gross receipts during 2023 and could not have had any gross receipts prior to 2019. Lastly, Eligible Small Businesses (ESB) may utilize the R&D to offset Alternative Minimum Tax (AMT). An ESB is defined as a Company with an average of $50 million or less of Gross Receipts for the prior three years.

These PATH Act changes have significantly broadened the scope for taxpayers to claim the Research and Development tax credit, resulting in substantial cash savings opportunities for small businesses. The increased access to the R&D credit benefit translates into reduced federal and state tax liabilities, not only for the current fiscal year but in perpetuity. Furthermore, these savings contribute to an uptick in a company’s market value, as the enhanced cash flow and reduced tax burden signal greater financial robustness and potential for growth to investors and stakeholders. The PATH Act’s provisions have created a more fertile ground for companies to flourish, leveraging tax incentives to foster innovation while simultaneously strengthening their financial footing.

In summary, the Protecting Americans from Tax Hikes (PATH) Act of 2015 has emerged as a game-changing piece of legislation for small businesses, particularly in its strategic enhancement of the Research and Development (R&D) tax credit. This Act not only offers substantial tax relief but also serves as a vital tool for small enterprises looking to maximize their financial strategies. By making the R&D tax credit more accessible, the PATH Act empowers these businesses to invest more in innovation while simultaneously benefiting from significant tax savings. This savvy tax strategy not only bolsters their immediate financial health but also sets the stage for long-term growth and competitiveness. Small businesses, often the backbone of the economy, now have an amplified ability to contribute to job creation and technological advancement, thanks to the PATH Act’s provisions. This Act exemplifies how targeted tax policies can be leveraged by small businesses to foster a thriving, innovative business environment.

Case Study: Qualified Small Business
Founded in 2021, this company performing R&D activities has been making losses since its inception. The Company does not generate an annual income tax liability due to the losses incurred. As such, the Company has not claimed the research credit. In 2023, the Company estimates gross receipts of $3 million with an estimated payroll tax liability of $120,000 in 2023. KBKG’s R&D Tax Credit experts calculated $320,000 of federal research credit. The Company may elect to offset $120,000 of 2023 payroll tax liabilities and carry forward $200,000 of unused R&D credits to offset future payroll tax obligations.