How the Permanent R&D Tax Credit Benefits Small Businesses & Start-ups
On the 18th of December 2015 House passed The Protecting Americans from Tax Hikes Act of 2015 (PATH), which made a number of federal tax breaks permanent. The Act, which was approved by a 318-109 vote, made the R&D Tax Credit permanent for the first time in history.
Aside from making the R&D tax credit permanent, The PATH act made variations to the credit which makes it more accessible to small companies and start-ups. To elaborate, two new provisions were introduced which we go into detail below.
Payroll Tax Offset
The new legislation permits start-ups to claim the credit against their payroll taxes, presuming that the employees are engaged in research and development. These companies can take a credit against the employer’s portion of FICA taxes (6.2%) – but FICA taxes only. Thus, an example of how this works and would be calculated is described below:
Your start-up company hires three people and they exclusively work 100% on qualifying R&D activities. Each one earns $70, 000 a year. Thus, with the Payroll Tax Offset the start-up would save a total of $13,020 – aka, 6.2% of their collective salaries. It is important to note that the R&D tax credit would only offset half of that amount if they only spent half their time on R&D.
Alternative Minimum Tax (AMT) liability
Beginning in 2016, businesses (and business owners) with less than $50 Million in gross receipts can now offset their AMT tax liability with R&D tax credits. This AMT modification facilitates small business owners who are currently subject to AMT to actually utilize the benefit of the R&D Tax Credit. In specific, this modification 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. Therefore, they can then use these tax savings to reinvest the saved tax dollars back into their businesses to strengthen R&D efforts and cultivate their companies.
In light of the changes listed above, there is no better time than the present to begin investing in R&D to boost innovation. Indeed, if there is one policy that has allowed for the expedition of innovation in the United States, then it would be the R&D tax credit. It is one of the biggest incentives in the United States which aids businesses participating in research and development. Moreover, it is not a competitive scheme – thus, in other words, if you are eligible then you are permitted to it. The classification is deliberately comprehensive as the Government wishes to support R&D across various business and industry sectors.
To discuss the R&D tax credit further, please contact Texas Tax Credit.