Understanding PATH Act Changes to the R&D Tax Credit Program

3 Minute Read
Posted by Brad Mols on Aug 19, 2020 2:41:45 PM

The research and development tax credit has incentivized and rewarded business owners for investing in innovation for almost 40 years. The program launched in the early 80s to help U.S. businesses invest in existing and emerging sciences as well as maintain our nation’s firm foothold as a global technology leader—and it worked. Every year, eligible organizations leveraged the benefits of the R&D tax credit to infuse their operations with additional working capital to grow, expand, and keep innovating.


The R&D Tax Credit Originally Had a Temporary Status

The research and development program was initially launched to help businesses of every size and across multiple verticals. However, the credit’s original legislation made it challenging for many organizations to tap into its benefits. When unveiled in 1981, the research and development program was only offered as a temporary tax credit, which meant that every year innovators and corporate technology leaders would have to wait to find out if the benefit was renewed before filing their annual taxes. 

The uncertain status of the innovation tax credit every year negatively impacted many qualifying companies that counted on the credit for long-term planning, budgeting, hiring and capital investment decisions. Not knowing if the program would continue meant that businesses couldn’t rely on its lucrative cash infusion with certainty. Instead, these companies would have to budget and plan based on the resources they knew they would have going into every fiscal year.

 

Original R&D Legislation Made it Tough for Smaller Businesses to Utilize the Benefit

From 1981 through 2015, you had to be profitable and pay income taxes to utilize the R&D credits. For smaller companies pursuing riskier initiatives, this often equated to a loss at the end of the year. Although the credit’s intent is to influence innovative risk taking, it didn't lessen the burden on these smaller companies not paying tax.

 

Three Important Ways the PATH Act Changed the Innovation Tax Credit

The R&D tax credit has undergone several iterations in its almost forty years of existence. However, in 2015, the program saw its most significant evolution to date with the Protecting Americans from Tax Hikes (PATH) Act. Officially passed in December 2015, the PATH Act eliminated some of the program’s former limitations and restrictions, beginning with its temporary (or quasi-temporary) status. Prior to the PATH Act, the R&D tax credit was generally extended in one- or two-year segments. The PATH Act solidified the program’s permanent status retroactively, as of 1/1/2015, immediately giving businesses confidence that they could plan and budget accordingly. 

The PATH Act also enabled companies operating at a loss to monetize or use the R&D tax credit—if they met the new qualification parameters. According to the current legislation, small businesses can now utilize up to $250,000 of research and development credits every year for up to five years against their payroll liability. To prove startup eligibility, taxpayers must show gross receipts totaling less than $5 million in the current tax year. 

More often than not, small business owners are subject to paying Alternative Minimum Taxes in addition to their regular taxes. Historically, the R&D credit couldn't reduce AMT. Consequently, you didn't receive any benefit. This limitation was recognized and corrected as part of the 2015 PATH Act. Fortunately, this meant that businesses with an average of $50 million or less in the prior three years could finally reduce their AMT in addition to their regular income taxes.


Does Your Business Qualify for the R&D Tax Credit?

Have you reevaluated R&D tax credit eligibility since the PATH Act passed? Contact Acena Consulting today to ensure you’re not missing out on this government-backed, dollar-for-dollar tax incentive.

 

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Brad Mols

Brad Mols

Acena Consulting Partner. Brad is a licensed CPA that has guided a broad range of clients in the manufacturing, technology, architecture, and engineering industries through specialized tax credits and incentives engagements.