Notable Research and Development Tax Credit Changes in the 2015 PATH Act

 
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The “Protecting Americans From Tax Hikes Act of 2015” (the “PATH Act”), signed by President Obama on December 18, 2015, includes three notable Research and Development (“R&D”) Tax Credit modifications.

Permanent Extension of the Research Credit

The most notable Research Tax Credit change resulting from the 2015 PATH Act is the permanent extension of the credit, effective as of January 1, 2015.  The credit had previously expired on December 31, 2014.  Additionally, the Act provides small businesses with two new options, allowing them to utilize the research credit to offset AMT liability, or elect to apply a portion of the credit against employer-incurred payroll taxes.

Offset AMT Liability

Under the 2015 PATH Act, the research credit is now considered a “specified” credit and may offset both regular tax and AMT in certain circumstances, effective as of January 1, 2016.  In order to use the credit to offset AMT liability, the taxpayer must meet the definition of an “eligible small business”1  – generally:

  • A corporation the stock of which is not publicly traded, a partnership, or a sole proprietorship; and,
  • Average annual gross receipts are not in excess of $50 million for the prior 3-year period.

Election to apply against Payroll Taxes

Also effective as of January 1, 2016, a start-up company now has the option to elect to use the research credit against payroll taxes, specifically the OASDI portion of the employer’s FICA taxes, for tax years starting after December 31, 2015.  In order to qualify for the election, the taxpayer must meet the “qualified small business”2 requirements specific to this election.  A “qualified small business”  can be a corporation, partnership, or sole proprietorship.  Qualification requirements are defined as:

  • Average annual gross receipts less than $5 million for the prior 3 years; and,
  • Did not have gross receipts for any tax year preceding the five-tax-year period ending with the current tax year. 

To elect the credit, the taxpayer must:
• Specify the amount of the research credit the election is being applied to; and,
• Make the election “on or before the due date (including extensions) of”3  the applicable return (for which the election is being made). 

Note, the consent of the Secretary is required to revoke the election4.

The payroll tax credit election portion of the research credit is defined as the lesser of:

  • The  “amount specified” (not to exceed $250,000) by the taxpayer under the payroll tax credit election5; or,
  • The research credit for the tax year determined prior to the application of the election6; or,
  • Where the qualified small business is neither a partnership nor an S corporation, the amount of business credit carryforward from the current tax year as specified under Code Sec. 39 (“Carryback and carryforward of unused credits”), determined prior to the application of the election7

The taxpayer is allowed the credit election for the first calendar quarter which begins after the date on which the taxpayer files the return specified in the election procedure, limited by the amount of the employer’s OASDI tax8.  Should the amount of elected credit exceed the calendar quarter payroll taxes, the excess may be carried forward to the next calendar quarter  and utilized.

Example: Company X meets the requirements of a qualified small business and has a research credit of $135,000 for the current tax year.  If X has a business credit carryforward of $55,000 from the current tax year, determined prior to the application of an election, then X’s payroll tax credit portion for the current tax year cannot exceed $55,000.

We are here to help

True Partners Consulting’s Federal Research and Development tax experts are available to help you assess the impact that the 2015 PATH Act (specific to the R&D tax credit) may have on your company. 

Download this Alert (PDF)

Please contact a member of our Federal R&D Tax Team to learn more about how we can help.

John Boseman
Research & Development Tax Credit Managing Director
408-625-5065

Samantha Kaye
Research & Development Tax Credit Senior Manager
408-625-5067

May Lee
Research & Development Tax Credit Senior Manager
408-625-5056

Robyn Christensen
Research & Development Tax Credit Senior Tax Consultant
408-625-5058
 

[1] See Code Sec. 38(c)(5)(C)

[2] See Code Sec. 41(h)(3)(A)

[3]Code Sec. 41(h)(4)(A)(ii)

[4] See Code Sec. 41(h)(4)(A)(iii)

[5] See Code Sec. 41(h)(2)(A)

[6] See Code Sec. 41(h)(2)(B)

[7] See Code Sec. 41(h)(2)(C)

[8] See Code Sec. 3111(f)(2)

[9] See Code Sec. 3111(f)(3)

Reference:

"Complete Analysis of the Protecting Americans From Tax Hikes Act of 2015, Other Tax Provisions of the Consolidated Appropriations Act, 2016, and Earlier 2015 Tax and Pension Acts." Federal Library Tax Legislation. RIA Checkpoint. Web. 20 Apr. 2016.

 

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