Startups Can Now Benefit from the R&D Tax Credit

Startups, welcome to the R&D tax credit party.

The days of the R&D tax credit’s temporary and retroactive extensions are finally over. Thirty-five years after its original introduction as a temporary provision of the tax code, the federal R&D tax credit was made permanent by The Protecting Americans from Tax Hikes Act of 2015 (“PATH” Act) last month.

In addition, the PATH Act includes two new provisions that will make it easier for startups as well as small and medium-sized businesses to immediately benefit from the lucrative R&D tax credit. These two modifications to the credit are effective for taxable years beginning after December 31, 2015.

Immediate value for startups

The first significant R&D tax provision introduced by the PATH Act will have a major impact on emerging and early-stage startups.

Historically, these startups that have yet to generate enough income to have a federal income tax liability could not get any immediate value from the R&D credit. They had to carry forward the credit in hope of applying it against a future income tax liability.

Starting in 2016, eligible startups with less than $5 million in gross receipts will now be able to use their R&D tax credit (capped at up to $250,000) to offset payroll taxes, generating immediate value.

AMT turnoff

The second key provision removes one of the biggest limitations that had prevented certain small and medium-sized businesses from capturing the credit in the past.

The PATH Act will allow eligible businesses with $50 million and less in gross receipts (based on a three-year average) to apply the R&D tax credit against the Alternative Minimum Tax (AMT). This is huge news for shareholders of qualifying pass-through entities (e.g., S corporations and partnerships) who have an AMT liability.

Act now

A common misconception about the R&D credit is that only large companies are eligible and that it’s too complicated to qualify. However, with the two major barriers discussed above mitigated or eliminated entirely, startups as well as small and medium-sized companies have an unprecedented opportunity to benefit from this valuable credit – and they need to start planning now.

Even with the changes, this credit remains one of the most challenging provisions of the tax code; therefore it’s critical for businesses to establish appropriate tracking mechanisms and documentation strategies for their research and development activities. A tax professional with R&D tax credit expertise can assist businesses with qualifying for and claiming the credit. Act now to take advantage of this new opportunity.

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Louis Guay is a tax manager in Kaufman Rossin’s Boca Raton, Florida, office, where he specializes in assisting taxpayers with R&D tax incentives. Kaufman Rossin is one of the Top 100 CPA firms in the U.S. Louis can be reached at lguay@kaufmanrossin.com.