Last month, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH act 2015) that will extend over 50 expired provisions of the tax code, including several key pro-business initiatives. Among the most vital aspects of the legislation, the extenders bill will expand and make permanent the Research and Development (R&D) Tax Credit, providing U.S. companies much needed certainty and greater access to one of the most valuable and pro-growth tax incentives.
– Summary –
the PATH Act meaningfully enhanced the R&D Tax Credit on several levels. The R&D Tax Credit had most recently expired on December 31, 2014. A tremendous paradigm shift to the R&D Tax Credit was made possible through the PATH Act of 2015 which not only renewed the R&D Tax Credit retroactively for all of calendar year 2015 but most importantly made the R&D Tax Credit program permanent. In addition, the enhanced R&D Tax Credit has been considerably restructured to:
- Allow eligible small businesses (i.e., average $50 million or less in gross receipts) to claim the credit against the Alternative Minimum Tax for tax years beginning after December 31, 2015; and
- Allow eligible startup companies (i.e., those with less than $5 million in gross receipts and earning revenue for less than 5 years) to claim up to $250,000 of the credit against the company’s federal payroll tax (FICA) for tax years beginning after December 31, 2015.
– Details –
The R&D tax credit was first enacted as a temporary credit in 1981. Since its original enactment, the credit has remained temporary and has expired 16 times, with only a one-year lapse in the credit from 1995 to 1996. In recent years, the credit has been allowed to expire, but has been routinely extended retroactively as part of tax extenders legislation. The credit last expired on December 31, 2014, and was not in effect for 2015 until it was retroactively and permanently reinstated by the PATH Act.
Like many other tax extenders provisions, the intent of the R&D tax credit is to encourage and incentivize businesses to undertake investment in R&D activities. Until now, companies have not had the faced because of the temporary nature of the credit.
After 34 years of not having certainty, the R&D credit is now a permanent provision of tax law. This certainty is a big win for businesses investing in research and development, particularly smaller businesses, as they now can plan for their R&D Expenditure and know that the R&D credit will be there for them to use.
Impact on Small to Mid-Sized Businesses
The legislation also broadens the impact of the credit for many small to mid-sized businesses. Starting January 1, 2016, unlike the prior law, under the new law, “Eligible Small Businesses” can utilize the R&D tax credit to offset the alternative minimum tax (AMT) they are subject to. This is especially true for many owners of pass-through entities. An Eligible Small Business is defined as a business with less than $50 million in average gross receipts for the three preceding years.
In addition, “Qualified Small Businesses,” 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 their 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. Any unused amount can be carried forward.
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.
Finally please note that the permanent extension of the R&D tax credit is effective as of January 1, 2015; however, the enhancements that allow the credit to offset AMT and payroll tax do not go into effect until January 1, 2016.
There was quite a bit of discussion in and outside of Congress to raise the rate of the ASC to 20% and to eliminate the traditional credit. In fact, the language was included in one of the drafts but it appears due to an error those changes were not included in the new law.
Please contact me directly if you have any questions or comments about R&D Tax Credit regime and/or discuss the scope and application of the PATH Act and its impact on your R&D Tax Credit claim and / or for assistance in identifying, quantifying, and documenting a sustainable R&D Tax Credit claim.
Read the JCT revenue estimates:
- JCX-143-15 (PATH Act)
- JCX-142-15 (Omnibus)
- For the statutory language of the new law –> Pub. Law 114-113.
- For the PATH Act Section-by-section summary
- 268-page technical explanation prepared by the JCT.