The research and development tax credit has always been a program of many moving parts and changing laws. First established in the 1980s, the R&D tax credit was initially viewed as a vehicle that only the largest and most elite organizations could leverage. However, like most tax legislation, the innovation tax credit has undergone rampant changes and updates over the last four decades, making it challenging for most business owners and entrepreneurs to keep up with the very latest research and development legal nuance.
The Evolution of the Alternative Minimum Tax
One of the biggest (and most frequently) changing components of the program is the Alternative Minimum Tax (AMT) obligation that taxpayers must meet to optimize the R&D benefit. Historically, businesses were unable to take advantage of the Section 41 credit if their business demonstrated no regular tax liability. As a result, many companies engaging in qualifying research expenditures were unable to leverage the cash-infusing benefits associated with the R&D program.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 was one of the first initiatives to make significant changes in the relationship between AMT and the R&D Tax Credit. The PATH Act's favorable adjustments to the research credit helped mitigate alternative minimum tax limitations, allowing small companies to offset their AMT (or payroll tax) burden against the research and development tax credit. The PATH Act instantly leveled the benefits playing field among companies of virtually every size, allowing start-ups and small corporations navigating through AMT and even loss positions to finally claim this lucrative credit.
The Tax Cuts and Jobs Acts Further Influenced R&D and AMT Relationship
The AMT for taxpayers claiming the innovation tax credit changed again in December 2017 with the passage of the Tax Cuts and Job Act (TCJA). While the TCJA reforms did not directly modify the basic foundation of the research and development tax benefit, it did adjust AMT regulations for both corporations and individuals. Before the passage of the TCJA, companies claiming the research credit could only benefit from the total amount that their regular tax burden surpassed AMT. However, beginning in 2018, the TCJA legislation repealed Alternative Minimum Tax requirements for C corporations, singularly eliminating AMT limitations on companies claiming R&D program benefits.
The TCJA legislation established different standards for individual taxpayers. The reform program increased the AMT exemption amount for individuals from 2018 through 2025. As a result, many taxpayers, including LLC members and S corporation owners, still find their total research and development benefit limited by the Alternative Minimum Tax. However, there are new rules that may allow partnerships and S corporations to maintain an exception from AMT restriction if they show average gross receipts over the previous three years of $50 million or less.
What Should You Know About AMT Restrictions?
The continuously changing AMT regulations can make it challenging to understand what limitations may be imposed on your research and development benefit. Acena Consulting can help. Our team of licensed accounting professionals specializes in research and development tax requirements, helping our clients stay ahead of evolving laws and program reforms. Contact us today to schedule an appointment with one of our leading R&D tax authorities.