While large companies enjoy substantially reduced tax burdens each year through the Research and Development (R&D) Tax Credit, many smaller and newly launched businesses routinely miss the opportunity to save. Start-ups in particular have traditionally faced formidable barriers to claiming the credit. Fortunately, the Protecting Americans from Tax Hikes (PATH) Act of 2015 made the R&D Credit a permanent part of the tax code and expanded its utility for numerous start-ups and other businesses.
Between the R&D Credit’s inception in 1981 and the enactment of the PATH Act, taxpayers were only permitted to apply the credit against their income tax liabilities. Therefore, new businesses that had not yet generated enough profit to owe income tax were unable to reap immediate savings, even if they were otherwise eligible for the credit. Since businesses tend to perform many R&D activities during the early stages of their operations, start-ups are often strong candidates for the credit and would greatly benefit from the generous tax savings as they begin establishing foundations for their success. The PATH Act has equipped these businesses with a solution by allowing them to use the R&D Credit to offset their FICA payroll tax liabilities.
In order to seize this benefit, businesses must have been operational for under six years and have $5 million or less in gross receipts for the current tax year and no gross receipts for the previous five years. The limit on the credit amount is $250,000 and it cannot exceed the taxpayer’s FICA liability during a given quarter. However, superfluous credits may be carried forward for use in later quarters.
The PATH Act also offers new tax savings opportunities for other small and medium-sized businesses. Business taxpayers that accumulated an average of $50 million or less in revenue over the past three years may now apply the R&D Credit toward their alternative minimum tax (AMT) liabilities.
The original goal of the R&D Credit was to spur innovation and technological development within the US. Contrary to common misconceptions that prevent many qualifying businesses from claiming this powerful incentive, the R&D Credit is available to businesses of all sizes representing a variety of industries, including architecture, engineering, and manufacturing. Eligibility for the credit does not require that the taxpayer engage in scientific research or groundbreaking innovation. In fact, businesses may find that many of their routine activities qualify. For architects, engineers, and manufacturers, examples of these activities include: developing architectural designs that accommodate client requirements, site conditions, or municipal codes; performing engineering calculations; evaluating and testing designs using modeling or computational analysis; and creating or improving a manufacturing process.
In light of the changes to the R&D Credit under the PATH Act, now is an excellent time for businesses to learn about this complex but lucrative provision and seek assistance in determining whether they may qualify. Capital Review Group has extensive experience helping businesses in various industries reap significant tax savings through the R&D Credit. Wondering if your business qualifies for this newly expanded incentive? Contact CRG today for a pro bono analysis!