When the R&D tax credit became permanent in 2015 under the PATH Act, it opened up incredible benefits for small businesses that can qualify in the United States. Not only did the signing of the PATH Act make the research tax credit permanent; it added provisions that help startup companies and small business owners that annual face the alternative minimum tax (AMT).
Today I am speaking to small business owners and their financial advisors. Let’s take a look at exactly how this incentive now brings even more benefit to you in the form of reducing both your regular tax and alternative minimum tax:
Is this the same as the Research & Experimentation Credit?
Yes, The R&D Tax Credit or R&E credit or research tax credit (found under Section 41 of the Internal Revenue Code) provides a federal tax credit for activities that develop or improve products, processes, software, techniques, formulas or incentives that are held for sale or use by customers.
In its simplest form, this is a tax credit given to companies for solving problems with innovative solutions. The R&D tax credit touches technology, software, manufacturing, construction, engineering, architecture, wineries and craft breweries, bio-technology, agriculture, aerospace and many other industries.
If there is innovation present, there may be an opportunity to take advantage of this tax incentive.
What is Alternative Minimum Tax?
Once upon a time, a new tax was enacted to make certain everyone (even millionaires) paid their fair share of income tax. This new tax was enacted (at the time) to tax wealthy taxpayers who made a significant amount of money and did not pay a reasonable percentage of income tax due to the character of their income (interest, dividends, or capital gains). Unfortunately for the rest of us, this new tax, the alternative minimum tax (or AMT) was not indexed for inflation. As a result, more and more Americans were subjected to AMT each year. Today, according to the Tax Foundation, 4 million taxpayers are subjected to the AMT. It is estimated that 62.5% of taxpayers with taxable income between $200,000 and $1 million pay AMT.
Until 2016, a taxpayer could use the R&D credit to reduce their Regular Tax but NOT their AMT. While a company could generate an R&D tax credit, it might not see any benefit if the shareholders were paying AMT (assuming the company passed the credits through to the shareholders from the pass-through entity).
Enter the PATH Act and Change to the R&D Tax Credit
Under the PATH Act, an “eligible small business” is defined as a privately-held corporation, partnership or sole proprietorship where the entities average gross receipts for the prior three years does not exceed $50 million.
Tax years beginning after 12/31/2015, eligible small businesses can now use the R&D Credit to offset not only regular tax but AMT as well.
Given the number of small business owners that currently pay AMT, this change has important and economically beneficial results.
So, if your company (or client) is conducting activities that may qualify for R&D tax credits and has been unable to realize the benefits of the credit due to AMT, they may now be able to take advantage of this tax incentive.
Not sure if you can qualify?
We can help assess your activities.
Not sure if you have the right documentation?
Let's take a look at what you have and determine if we can support your R&D tax credit claim.
Have more questions or need help to document and calculate your R&D tax credit? Give us a call!
At Acena Consulting, we recognize that you have a lot more on your plate than worrying about another tax credit. Our role is to bring strong tax technical knowledge, ability to build efficient processes, and answer the questions you may not know to ask.
We take this concern off your list so you can focus on your core business.
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