Why the R&D Tax Credit is Now Better than Ever

Many business owners think only large companies conducting groundbreaking research can claim the federal R&D tax credit or that it’s simply too difficult to qualify.  However, this simply isn’t true.

In fact, new changes to the valuable credit are making it easier than ever for startups as well as small and medium-sized companies to benefit.

My colleague, Louis Guay, is a tax manager who specializes in the R&D tax credit and has experience analyzing research and development to help companies qualify. He shared the following information about the new changes introduced for 2016.

What has changed?                                              

After 35 years as a temporary provision of the tax code, the federal research credit – better known as the R&D tax credit – was made permanent by The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) in December 2015. Along with this change, the PATH Act includes two new provisions that make it easier for businesses to benefit from the R&D tax credit.

The credit is available to companies developing or improving products, processes, or software in a variety of industries related to hard sciences (chemistry, physics, biology, etc.), engineering or computer science. To learn more about the types of activities that can qualify, read this R&D tax credit FAQ.

How do the new changes benefit startups?

The first new R&D tax provision will have a huge impact on startups. Previously these early-stage companies that were not generating enough income to have a federal income tax liability could only carry forward the credit for use in future years. Starting this year, eligible startups with less than $5 million in gross receipts can apply up to $250,000 of their R&D tax credit against their payroll taxes. So now even if you don’t have a federal tax liability, the credit can generate immediate value for your business.

How do the changes benefit small and medium-sized businesses?

The second provision is great news for shareholders of qualifying pass-through entities, (such as an S corporation) who have an Alternative Minimum Tax (AMT) liability. Removing a barrier that had prevented many small and medium-sized businesses from obtaining the credit in the past, this change allows 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 AMT liability.

Are there any obstacles to claiming the R&D tax credit?

Companies looking to claim the credit will need to implement a documentation process and appropriate tracking mechanisms for their research and development activities. Even with the recent law changes, the R&D credit remains one of the most challenging provisions of the tax code, therefore businesses should consider engaging a tax professional with R&D tax credit expertise to help them qualify for and claim this lucrative credit.

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Lisa Kahn Little, CPA, is an associate principal in the Entrepreneurial Services department of Kaufman Rossin, where she works with entrepreneurs, high-net worth individuals and nonprofits. She is a certified QuickBooks ProAdvisor, a licensed Certified Public Accountant in the State of Florida, and a member of both the American Institute of Certified Public Accountants and Florida Institute of Certified Public Accountants. Lisa can be reached at lklittle@kaufmanrossin.com.