The Alternative Minimum Tax: a Basic Definition
As with most tax laws, the Alternative Minimum Tax is chock full of tedious legislation and hard-to-discern nuances that require careful consideration when calculating final taxpayer responsibility. However, as a standardized (and much-simplified) definition, the Alternative Minimum Tax is a federal income tax levied on qualifying individuals, estates, trusts, and corporations. Designed as a required alternative to the standard income tax, the AMT is triggered when taxpayers generate income that exceeds a designated threshold.
AMT calculations begin with taxable income, systematically eliminating specific deductions such as state income taxes, certain forms of depreciation, and medical expenses. After removing relevant deductions, the AMT is recalculated using an appropriate flat percentage, allowing taxpaying entities to compare calculated Tentative Minimum Tax (TMT) to calculated regular tax. After both taxes are effectively computed, the taxpayer must pay the higher amount.
Key Considerations of R&D Tax Claims and AMT
Once taxpayers in the research and development vertical recognize basic AMT guidelines, they often wonder how the AMT will affect innovation tax credit benefits. More specifically, they ask their financial professionals if their R&D tax credit offsets AMT. The short answer? Yes—but this is a fairly new development for taxpayers. Previous generations of business owners could only offset regular income tax and not calculated TMT. At that time, taxpayers required to pay TMT would not receive a tax reduction or refund when filing an R&D tax credit.
However, in the 2010 tax year, Congress offered an exception to this rule to help taxpayers struggling through a recession economy. In the 2010 tax year, taxpayers were allowed to utilize certain Section 38 tax credits (including research and development) against AMT. The reprieve was initially short-lived. After the 2010 tax year, the exception was eliminated, until 2015 when Congress passed the Protecting Americans from Tax Hikes (PATH) Act.
The PATH Act was implemented to help eliminate some of the barriers faced by business owners trying to claim the research and development credit. It also helped streamline access of the credit to qualifying small businesses, allowing eligible small companies to leverage up to $250,000 of research credits against their payroll tax liability every year. Finally, the PATH Act allowed small businesses with qualifying research and development activities to use the R&D credit to offset AMT, a major win for taxpayers looking to reduce overall tax obligation and drive cash flow opportunities.
Professional Assessment Can Minimize R&D Tax Credit Risk
The best way to determine how AMT can impact your research and development benefit is to consult with a licensed team of accounting advisors that specialize in the R&D tax credit vertical. At Acena Consulting, we work with business owners across several industries to aggregate data and documentation to help our clients make the right financial decisions for their business. Contact us today to hear more.