Please see our updated blog post regarding AMT and the R&D Tax Credit
One of the questions that come up in almost every client meeting is whether or not the R&D tax credit will offset Alternative Minimum Tax (and if it doesn’t come up, we usually bring it up so the client understands how it might reduce his potential refund or tax reduction).
Let’s look at the impact taking a Research & Development Tax Credit can have on an individual’s tax situation:
What is Alternative Minimum Tax?
Alternative Minimum Tax (AMT) is a federal income tax imposed on individuals, corporations, estates, and trusts. It is calculated at a nearly flat tax rate on adjusted taxable income above a certain threshold. AMT starts with Taxable Income and eliminates certain deductions such as state income taxes, certain depreciation, and medical expenses. Once these deductions are eliminated, tax is recalculated using a specific percentage. The calculated Tentative Minimum Tax (TMT) is then compared to the calculated regular tax. The taxpayer must pay the higher of the calculated regular income tax or TMT (this is a much-simplified explanation of the AMT, but hopefully provides enough information to understand it for our purposes today).
Does the R&D Tax Credit offset AMT?
In short, no.
But there is more…much more to the story than a simple no.
First, Congress did provide one year for taxpayers to utilize certain Section 38 tax credits against AMT for the 2010 tax year (including the Research & Development tax credit). This was done to help taxpayers in a very difficult economy. However, the reprieve was temporary and only for the one tax year.
In all other years, the Research & Development tax credit can only offset regular income tax and not TMT. If you are a taxpayer, that is already paying TMT, taking an R&D tax credit will not provide a tax reduction or refund.
Hidden landmines in prior years
There are still a number of taxpayers that have not taken advantage of the Research & Development tax credit and have now decided they both qualify and want to take advantage of the opportunity. In cases where the decision is to harvest research tax credits from prior years, analysis should be done.
Depending on the individual tax position of the taxpayer, taking a Research & Development tax credit in a prior year could result in paying additional taxes rather than receiving a refund. This result come about because taking a regular Research & Development tax credit in a prior year means the taxpayer must add back to income the amount of the tax credit taken.
If you are already paying TMT, additional income (taken as a result of taking a Research & Development tax credit on an amended tax return) will most likely result in additional tax, increasing your TMT (and regular tax). Because the R&D credit would not help reduce your TMT, the result is additional taxes due.
The credits generated in prior years would be carried forward into future tax years and can be used to offset current tax (provided you are not paying TMT).
Proper Assessment is the Key
Taking a Research & Development tax credit through an amended tax return can still result in a refund or in providing tax credits for the current year to offset taxes. However, completing the proper assessment is critical to understanding the implications of taking a Research & Development credit on an amended tax return.
Acena Consulting R&D Credit Audit Support
A Tier 1 Issue
In closing, taking a Research & Development tax credit on an amended tax return remains a Tier One issue and, as a result, can increase the potential for IRS Audit. Taxpayers should consult Research & Development tax credit specialists to get more information before amending their tax returns in prior years.
What say you my friends?
Have you considered harvesting research tax credits from prior years?
How has AMT impacted your ability to use tax incentives?
Randy Eickhoff, CPA is President of Acena Consulting. With more than 20 years of tax and consulting experience, Randy focused on helping companies successfully document and secure tax incentives throughout the US. He has been a long-time speaker nationally as well as conducted numerous training sessions on tax credits and other US tax incentives.
Acena Consulting, LLC
All rights reserved