Businesses have been waiting all of 2015 for Congress to move forward on passing an “extenders package,” which would extend the research credit as well as a number of other significant tax-saving provisions. Earlier today, Congress passed the Protecting Americans from Tax Hikes (PATH) Act of 2015, and the President is expected to sign the bill into law. View Wipfli Alerts & Updates: URGENT – Congress Passes PATH Act.
Prior to the passage of the PATH Act, businesses were not allowed to claim the research credit on expenses that were incurred on or after January 1, 2015. This bill has made the credit retroactive to the beginning of 2015 and also makes it a permanent credit. Prior to this bill, Congress has been extending the tax credit every year or two since its inception; this passage creates a favorable benefit for many taxpayers.
Calculating the Credit – Getting Technical
Businesses are allowed to use one of two calculation methods, the Regular Credit method or the Alternative Simplified Credit (ASC) method. The Regular Credit method has a higher credit rate (20 percent) but may be more difficult to compute because the base period is tied to the 1984–1988 time period. The ASC method may be easier to compute because the base period relies on the prior three years; however, it has a lower credit rate (14 percent) than the Regular Credit method.
In addition, beginning in 2016 for eligible businesses with average annual gross receipts of $50,000,000 or less for the prior three years, the credit can offset both the regular tax and the Alternative Minimum Tax (AMT). In 2010, Congress provided this provision as a one-time opportunity for the same taxpayers. This provision is now included permanently. Many businesses that are flow-through entities have been eligible for the credit. However, the owners were subject to AMT and, even with planning, might not have been able to fully utilize the credit but will now receive a significant opportunity to reduce their tax liability.
Congress also added a new provision that allows small start-up businesses to elect to offset payroll taxes with the credit. This provision applies to start-ups that have less than $5,000,000 of gross receipts and did not have gross receipts in any of the preceding five-taxable-year period.
Qualifying for the Research Tax Credit
Since 1981, businesses have been eligible for a federal tax credit (a direct reduction in the amount of taxes paid) for increases in their qualified research spending. Over the past 30 years, however, there have been a number of changes in how the credit is calculated and which activities qualify. Contrary to popular belief, the research tax credit isn’t limited to high-tech, biotech, and pharmaceutical companies. If your company does any of the following, you may qualify for the research credit:
- Design and/or manufacture products
- Produce parts to customer part prints or specifications
- Custom design and build machines for sale or use in operations
- Develop new, improved, or more reliable products/processes/formulas
- Design tools, fixtures, jigs, molds, or dies
- Develop or apply for patents
- Develop software
Maximizing Your Opportunities
Proper understanding of the tax law can result in substantial savings. Wipfli’s dedicated team of tax professionals specializing in R&D tax law is ready to help you maximize your opportunities. Please contact Scott Schumacher, Valerie Fedie, Christopher Blaylock or your Wipfli relationship executive for assistance.
To learn more about the research credit and the benefits your business can gain from claiming the credit, please click here.