R&D Tax Credits and Alternative Minimum Tax (AMT)

Businesses with average annual gross receipts under $50 million can now use R&D tax credits to offset both regular tax and AMT. Previously, companies subject to AMT couldn’t use R&D credits to lower their tax liability.

Eligible Small Business Definition

Under Section 38(c)(5)(C), an “eligible small business” is defined as:

• A non-publicly traded corporation, partnership, or sole proprietorship.
• It must have average annual gross receipts of $50 million or less for the three-taxable-year period before the current tax year.

Special Rules (Section 448(c)(3)):

• If the business or its predecessor was not in existence for the full three years, the gross receipts test applies to the period it was in existence.
• For short tax years, gross receipts must be annualized.

Additional Details

• Gross Receipts Adjustment: Gross receipts must be reduced by returns and allowances.
• Controlled and Affiliated Groups: All members of controlled groups or businesses under common control are treated as a single entity.
• Partners and S Corporation Shareholders: Both the partnership/S corporation and the individual partner or shareholder must meet the gross receipts test to qualify.

This change provides greater tax planning flexibility for small businesses engaged in R&D, potentially lowering their overall tax burden.

For more information, contact our team or consult with your Swanson Reed tax advisor to understand how you can benefit from the R&D tax credit.