During December 2015, President Obama signed The Protecting Americans from Tax Hikes (PATH) Act. The Act makes permanent multiple key tax provisions, including enhanced section 179 expensing and the American Opportunity Tax Credit, while extending and enhancing several others. One of the most notable changes is that the regulation permanently extends the research and development (R&D) tax credit.
The R&D tax credit is a benefit that provides financial incentive for companies performing research and development in the US. The credit covers companies that invest time, money, or resources to design, develop, or improve their products, formulas, processes, etc. Under previous law, the R&D tax credit could only be used to offset regular tax. This rule limited many smaller companies and owners of pass-through entities if they were subject to the alternative minimum tax (AMT).
The PATH Act permanently extends the credit and also broadens the impact to reach more small to mid-sized businesses. The permanent extension retroactively takes effect for the 2015 tax year. Beginning January 2016, eligible small businesses will be able to use the R&D credit to offset AMT. An eligible small business for this purpose is a business with less than $50 million in average annual gross receipts for the three preceding years.
In addition, qualified small businesses can now use the R&D tax credit to offset the FICA employer portion of payroll tax. A qualified small business in this instance is defined as a business with less than $5 million in average annual gross receipts for the three preceding years and does not have gross receipts for more than 5 years. The amount of credit to be used in this manner is capped at $250,000 for each qualified year.
These enhancements to the R&D credit significantly enhance the abilities of smaller businesses and startups to benefit from the R&D credit. At Cassady Schiller, we are here to help you take full advantage of these new rules and welcome the opportunity to discuss how these changes may impact you.
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