Manufacturers: Have You Considered the R&D Tax Credit?
Currently, the research and development (R&D) tax credit and other related tax breaks save U.S. businesses more than $12 billion a year. However, as it stands, only one out of every 20 eligible businesses takes advantage of the R&D credit. The manufacturing sector, in particular, often overlooks the credit due to a misconception that they don’t qualify.
Whilst scientific experimentation is the obvious activity to qualify, you don’t need to be tinkering with vials and test tubes to be eligible for R&D—applied sciences definitely count and the trial-and-error testing completed on the factory floor is just as valid as that occurring in a lab. Furthermore, in December 2015, the federal R&D tax credit was made permanent by The Protecting Americans from Tax Hikes Act of 2015 (“PATH” Act). Aside from being made permanent, the R&D tax credit was made more accessible for manufacturers by allowing small businesses to claim the credit against the Alternative Minimum Tax (“AMT”)
Previously, the greatest barricade averting manufacturers (principally small and mid-sized manufacturers) from claiming the R&D Tax Credit was the AMT floor. To elaborate, majority of small and mid-sized manufacturing businesses are structured as pass-through entities, and are as such taxed at the owner’s individual tax rate. In the past, this would typically result in the owner being subject to the AMT floor, meaning that even if a business had engaged in activities that would customarily qualify them for the R&D Tax Credit, that business would still effectively be obstructed from what can be substantial tax savings.
In contrast, starting in 2016, the PATH Act effectually switches off the AMT bar for “eligible small businesses” (defined by the legislation as businesses with less than $50 million in average gross receipts for the prior three years) that qualify for the R&D Tax Credit.
While this may just seem like tax jargon, this modification is a vital update and will have a heavy influence on both U.S. businesses and the manufacturing sector as a whole. The eradication of the AMT barrier is projected to permit for a ten-fold increase in the number of small businesses that can utilize the R&D tax credit—and with manufacturers being amid the most suitable applicants for the credit, this single modification could inject a significant cash flow to the sector in the upcoming years.
Hence, with these new modifications to the credit, manufacturers who were rejected by the IRS in the past or—due to ambiguity surrounding the tax laws—evaded applying for the credit completely, should re-examine the new and amended R&D Tax Credit. In increasingly competitive marketplace, the R&D Tax Credit could lower the effective tax rate and refuel a manufacturing company’s R&D efforts through increased cash flow.
If you would like to discuss the R&D Tax Credit or the AMT changes further, please do not hesitate to contact Texas Tax Credit today.