Congress is spreading some cheer this holiday season in the form of tax breaks for both businesses and individuals. The Protecting Americans from Tax Hikes ("PATH") Act of 2015 was passed by both the House and the Senate and is a groundbreaking $650 billion tax extender bill aimed at providing taxpayers certainty and opportunity into the future. Although much of the attention has been on the recent change to make the R&D Tax Credit permanent, the biggest change with respect to the research credit comes from two new options for taxpayers to utilize the credit. Taxpayers that couldn't utilize or take full advantage of the tax credits in the past should now reassess their eligibility and possibly take advantage of this lucrative incentive. Below is a summary of the changes made to the R&D Tax Credit:

  • Allows for eligible small businesses ($50 million or less in gross receipts) to claim the credit against alternative minimum tax ("AMT") for tax years beginning after December 31, 2015.
  • Allows eligible startup companies (those with less than $5 million in gross receipts and earning revenue for less than 5 years) to claim up to $250,000 of the credit against the company’s payroll tax for tax years beginning after December 31, 2015.
  • Allows for the permanent extension of the R&D Tax Credit.

Although the AMT and payroll tax provisions of the bill are effective for tax years beginning after December 31, 2015, there are some tax planning benefits in the short term KBKG can assist with.

CASE STUDY: Eligible Startup Business
A Silicon Valley software development Company, founded in 2013, has been in losses since inception. Most of the work they do qualifies for the research credit but since the Company doesn’t anticipate income tax liability, they have not pursued the research credit. The Company estimates gross receipts of $3 million in 2016 with estimated payroll tax liability of $60,000. KBKG’s R&D Tax Credit experts estimate the Company is eligible for $100,000 of federal research credit. Due to the new rules in the PATH Act, the Company should secure their research credit to save $60,000 in payroll tax while the $40,000 of unused credit is carried forward to offset future payroll tax.

Author: Kevin Zolriasatain | Co-Author: Luis Guerrero, MBT