Happy Holidays: The R&D Tax Credit Goes Permanent!

It’s been coined pro-innovation, pro-growth, and even pro-America. Certainly, the research and development, proverbially termed R&D, tax credit is no short of bywords. Now the popular credit is set to add another descriptive label to its name – permanent.

Previously, the R&D tax credit has always been temporary since its formation in 1981. In the past 34 years, the credit has been expired 16 times and, on more than one occasion, was expired for almost an entire tax year before being retroactively reinstated. However, on the 18th of December 2015, House passed a bill that seeks to make permanent a number of federal tax breaks.

Just in time for the holiday season, Congress’s Christmas-tree tax bill contains surprising presents, namely, permanent extensions of tax benefits for individuals that have long been temporary. The Protecting Americans from Tax Hikes Act of 2015 (PATH) was approved by a 318-109 vote, and most notably, makes the R&D tax credit permanent.

Undeniably, a permanent R&D tax credit will allow companies to be able to plan their long term research and development projects with greater certainty. Moreover, with increased certainty comes greater investment into research and development, thus raising innovation in the nation and helping the US compete in a global economy.  The PATH act, aside from making the R&D tax credit permanent, also makes changes to the credit to help more small and medium sized companies utilize it.  In particular, businesses with less than $50 million in gross receipts will be able use the credit to offset the Alternative Minimum Tax (AMT). The credit is obtainable to start-up companies with gross receipts of less than $5 million a year to use the credit against their payroll taxes (capped at a maximum of $250,000) for up to five years.

Now that the credit is permanent, and consequently more reliable for annual planning, it may provide more incentives for business executives to contemplate long-term funding of research and development activities as a line item on their financials. Indeed, the R&D Credit encourages innovation and is a vital incentive for allowing companies to deduct the expense of research, development, and hiring of workers to conduct R&D. To discuss the R&D tax credit further, please contact one of our Specialist R&D Tax Consultants at Swanson Reed.

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