New Legislation Allows Eligible Businesses Claiming the Research Credit to Offset Alternative Minimum Tax
(This blog post was originally published on February 1, 2016. You may also be interested in our March 13, 2018 post “Tax Reform Just Made AMT a Lot Less Problematic for the R&D Credit“)
Innovative businesses, especially small to mid-size businesses, have more reason than ever to be excited about the Federal R&D Tax Credit.
On Dec. 18, 2015 the President signed the Protecting Americans from Tax Hikes (PATH) Act of 2015. Not only did this bill make the R&D Tax credit permanent, it added the ability to utilize the credit against both Alternative Minimum Tax (AMT) and Payroll Tax on a limited basis for certain businesses.
Why is this so huge? Because historically, AMT has served as a limitation barring many small and medium size businesses from benefiting from the research credit. For instance, even if a business was conducting credit eligible activity and calculating a credit on its tax return, the company would not be able to utilize the credit against its full tax liability if it was subject to AMT. Hence, many businesses found it difficult to justify the work involved in calculating the credit when only a portion, if any of that credit would be available for their immediate use.
Going forward, the research credit can now offset both regular tax liability and AMT liabilities for taxable years beginning January 1, 2016.
Who is Eligible?
The PATH Act does set some limitations around businesses eligible for this new AMT offset. IRC Section 38(c)(5)(C) defines an “eligible small business” as 1) a corporation the stock of which is not publicly traded, 2) A partnership, or 3) a sole proprietorship, AND if the average annual gross receipts of such corporation, partnership, or sole proprietorship for the 3-taxable-year period preceding such taxable year does not exceed $50,000,000.
In simplified terms, if your company is looking to claim the credit in 2016, you would need to look at your 2015, 2014 and 2013 gross receipts, tally the total and divide it by 3. If that number is lower than $50M your business would be eligible to offset AMT.
Adding It Up
So, what is the actual benefit to a taxpayer in dollars and cents? To give you an idea, let’s assume your business has a regular tax obligation of $100,000, a tentative minimum tax of $80,000, and a professionally calculated research and development tax credit of $40,000.
Under the prior law, only half of your $40,000 research credit could be claimed, still leaving you with a net tax liability of $80,000. Under the new regulations, you would be able to claim the entire $40,000 R&D credit, leaving you with a total tax burden of $60,000. Hence, the new rules would actually allow you to reduce your AMT by $20,000.
Of course, things are rarely as simple as the situation outlined above. There are almost always other tax considerations in play. This requires a case-by-case analysis of each taxpayer’s situation and a lot of complicated math that I’ve left out of this article.
Suffice it to say, it’s these kinds of mathematical complications that lead many businesses to enlist the services of experts to help them navigate the process of claiming their full share of the R&D tax credit.
If your small business is working to create new or improved products or processes, and has historically been susceptible to AMT, 2016 may just be a game changing year for your research credit.
To learn more about how these new regulations might help you recoup some of your research costs, contact me at [email protected] for a free consultation.