The Protecting Americans from Tax Hikes (PATH) Act, enacted on Dec. 18, 2015, made the research and development (R&D) tax credit permanent and included some attractive enhancements. The new law was in effect for the past year, and now small and mid-sized businesses are getting ready to file their 2016 tax returns and take advantage of the enhancements for the first time. The 2016 credit enhancements can have a big impact on many of these businesses by expanding their ability to utilize the credit.
Eligible Small Businesses
One of the enhancements included in the PATH Act is that "Eligible Small Businesses" may now claim the R&D tax credit against alternative minimum tax (AMT) liability. An Eligible Small Business is defined as a business with less than $50 million in average gross receipts (i.e. revenues) for the three preceding years.
Prior to the PATH Act, the R&D tax credit could only be used to offset regular tax. This rule limited many small to mid-sized businesses in their ability to use the credit if they were subject to AMT. This is especially true for many owners of pass-through entities. However, one thing to keep in mind, the $50 million average gross receipts rule for the three prior years is applied both at the entity level and at the shareholder level.
For example, a business may be below the $50 million threshold and thus qualify, but if a shareholder has gross receipts from other entities, it could push them over the threshold and make them ineligible for the AMT offset.
Qualified Small Businesses
The other enhancement benefits "Qualified Small Businesses." A Qualified Small Business, defined as a business with less than $5 million in annual gross receipts and having gross receipts for no more than five years, will now be able to use the R&D tax credit to offset the FICA employer portion of payroll tax. The amount of credit that can be used to offset payroll tax is capped at $250,000 for each eligible year. For purposes of this provision, all members of the same controlled group, or group under common control, are treated as a single taxpayer. The annual election under this section must be made on or before the due date (including extensions) of its originally filed return. The credit will be available to offset the FICA employer portion of payroll tax for the first calendar quarter beginning after the date on which the Qualified Small Business files its income tax or information return for the taxable year.
An example of this would if the 2016 tax return is filed on March 15, 2017, the credit would be available to offset the payroll tax no sooner than the second quarter of 2017.
Immediate Cash Benefits
The enhanced ability for small businesses to currently use the credit should result in more immediate cash benefits for many companies, particularly start-ups, because they will not have to wait until they generate taxable income to take advantage of the credit savings. Watch our recent R&D tax credit video to learn more.