Not your father’s research & development credit

Your Guide to State, Local, Federal, Estate + International Taxation

research & development credit, research and development, tax credit, tax, IRS, write offThe year 1981 is not often referred to as “one for the ages,” but a quick Google search exposes a different legacy. In 1981, Ronald Reagan became President, Sandra Day O’Connor was nominated to the Supreme Court, Raiders of the Lost Ark topped the box office and MTV, Post-It Notes and frequent flier miles were born! Another unsung hero of 1981 is the birth of the Federal Research & Development Credit. Not much has changed with this economic incentive over its 35 year history, until 2015.

The Protecting Americans from Tax Hikes Act of 2015, made several significant changes to this middle aged R&D Tax Credit:

  • The R&D Tax Credit was made permanent – no longer subject to annual renewal/extension
  • Removal of the Alternative Minimum Tax (AMT) Limitation
  • Ability to utilize R&D Credits to offset payroll taxes

The former critics of the R&D Tax Credit often claimed these incentives were more geared toward larger established corporations, but the 2015 alterations have seemingly opened the doors to small and medium sized businesses (SMBs). The offset of AMT now makes claiming the credit more appealing to small corporations and pass-throughs (S-Corps, LLCs and LLPs). The ability to offset $250,000 of FICA taxes annually for qualifying businesses incentivizes the start-up community.

Does your business invest time, money and resources in order to design, develop or improve a process, product or software (that’s a mouth full)? If so, and if you qualify as an SMB, the R&D Tax Credit is certainly worth a second look.

Qualified SMB

  • AMT Offset – Average less than $50 million in gross revenues over the past 3 years
  • FICA Offset – Have less than $5 million in gross receipts with no more than 5 years of operations

Lastly, one would be remiss in not mentioning the wonderful benefits of individual state R&D Credits that are out there, including our very own partially refundable Arizona R&D Credit. Do not miss out on the great economic cash incentives of the Research & Development Credit that can benefit companies of all shapes, sizes and industries.

Steve Pope, CPA