Research and Development Credit – Can Your Small Business Benefit?

The Protecting Americans From Tax Hikes Act of 2015 (PATH Act) made several changes to the Research & Development Credit, which works to the benefit of smaller businesses. Specifically, the PATH Act of 2015 made the following changes to the Research & Development Credit:

  1. The credit for increasing research activities has been made permanent;
  2. The credit for increasing research activities may offset AMT liabilities for eligible small businesses; and
  3. A Qualifying Small Business may elect to apply up to $250,000 of the credits against payroll taxes

To qualify as an eligible small business a taxpayer must be:

  • A privately held corporation;
  • Partnership; or
  • Sole Proprietorship

In addition, the average gross receipts of the entity must not exceed $50M for the three preceding tax years. If the individual or partner to whom the credits are being passed through exceeds the $50M threshold it may not take the credit against its own taxes.

Also, as part of the PATH Act, the R&D credit was made retroactive to tax year 2015 to cover the gap in the period when the credit lapsed.

It is unclear whether the rules shielding taxpayers from the AMT is retroactive such that taxpayers may amend their returns and claim the credit against any AMT they may have paid.

If you would like to discuss this further, call the Morrison, Clark & Company team.