Understanding Small Business R&D Tax Credits

business-861323_960_720If your company is engaged in R&D of any variety, you may be missing out on generous tax savings. In fact, a common misbelief surrounding the R&D tax credit is that only large corporations qualify and that it’s too complex to apply for. Indeed, when it comes to claiming the R&D tax credit, far too often business sow the seeds of self-censorship.

However, new alterations to the valuable credit are making it easier than ever for startups and small businesses to benefit. To elaborate, thirty-five years after its original formation as a temporary provision of the tax code, the federal R&D tax credit was finally made permanent by The Protecting Americans from Tax Hikes Act of 2015 (“PATH” Act) in December 2015. Within the PATH Act, two new provisions were outlined which makes it more accessible for smaller businesses. As a result, we’ve broken down the key elements of the changes below.

How do the new alterations benefit startups?

The first new R&D tax provision will have an enormous effect on startups. Formerly, early-stage companies that were not producing adequate income to have a federal income tax liability could only carry forward the credit for use in future years. Beginning 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 instantaneous value for your business. Read more about the Payroll Tax Benefit with examples here.

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

The second provision is a positive update for shareholders of qualifying pass-through entities, such as S corporations, that have an Alternative Minimum Tax (AMT) liability. 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. Ultimately,  this eradicates a huge obstruction that had prohibited many small businesses from obtaining the credit in the past. Read more about the AMT liability here.

Despite these positive changes to the R&D tax credit, claiming the credit remains one of the most challenging provisions of the tax code. Thus, it is recommended that businesses should consider engaging a tax professional with R&D tax credit expertise to help them qualify for and claim this beneficial credit. Swanson Reed has a broad range of experience assisting a vast range of industries. Contact us today to learn more about the R&D Tax Credit and what your tax savings could be!

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