As 2015 comes to a close, so too does the uncertainty concerning the R&D tax credit. Over the last several years, congress’ last minute negotiations have often made the credit provisions retroactive; creating scenarios where businesses were unsure of whether their current investment in R&D would be eligible for future tax credits. The Protecting Americans from Tax Hikes (PATH) Act of 2015 extends and expands the R&D tax credit through the following provisions:
- The R&D Tax Credit will become permanent as of January 1, 2015.
- Beginning in 2016, eligible small businesses, ($50 million or less in gross receipts) may claim the credit against Alternative Minimum Tax.
- Beginning in 2016, certain start-up businesses that may not have an income tax liability will be able to offset up to $250,000 in payroll taxes with the credit.
The definition of R&D provided by the tax code is intentionally broad so companies from several industries can be rewarded for developing new or improved technologies. You may qualify if you are involved in any of the following:
- Creating new or improved products
- Creating new or improved processes
- Developing software
- Designing and engineering
The federal R&D tax credit is generally 4.5 percent to 6.5 percent of a company’s qualified research expenses. Qualified research expenses include wages, supplies and contract research expenditures related to qualified research activities. Additionally, many states provide tax credits for performing R&D activities within the state.
Many companies lack a solid understanding of the credit, how to apply it and what expenses and activities qualify. A good “next step” for most companies is to visit with an R&D tax credit specialist to review potential opportunities. The PATH Act finally provides the long-term stability and incentive for businesses to expand and innovate. Moving forward, we expect to see both an increase in the number of companies claiming the credit, as well as an increase in R&D investment as a result of the credit’s permanency. For more information on the R&D credit or assistance in quantifying potential benefits, contact your BKD advisor.