Startups: Why the R&D Tax Credit Should Appear on Your New Year Resolution List
Perhaps your ‘Dry January’ disintegrated on day five or your resolve to eat healthy collapsed with a hoovering of the Christmas cheese (so you can finally start eating healthily, of course). Certainly, we have officially started the second full week of the New Year and the promises you made in the last few minutes of the previous year may have started to dwindle. However, when it comes to businesses, the New Year period can serve as the perfect motivator for those looking to expand their business operations. Research and Development (R&D), in particular, can assist firms in cultivating cash flow and innovation by developing or improving products, processes or software.
Most notably, there is one policy that has allowed for the expedition of innovation in the United States, and that is the R&D tax credit. Up until last month, the federal R&D tax credit was always temporary and was retroactively extended year after year. In December 2015, the federal R&D tax credit was made permanent by The Protecting Americans from Tax Hikes Act of 2015 (“PATH” Act).
Apart from instilling confidence in US businesses to invest in R&D, the PATH Act included two new provisions that will make it easier for startups and small and medium-sized businesses to immediately benefit from the R&D tax credit. Starting in 2016, suitable startups with less than $5 million in gross receipts will now be capable of using their R&D tax credit (capped at up to $250,000) to offset payroll taxes, producing instantaneous value.
The second key provision of the PATH Act eradicates one of the major restrictions that had prevented many small and medium-sized businesses from seizing the credit in the past. The PATH Act will now permit 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 Alternative Minimum Tax (AMT). This is an enormous update for shareholders of eligible pass-through entities (e.g., S corporations and partnerships) who have an AMT liability.
Undeniably, a common misbelief surrounding the R&D tax credit is that only large corporations qualify and that it’s too complex to apply for. Nonetheless, with the two major barriers discoursed above alleviated or eradicated completely, startups and small and medium-sized companies now have an unparalleled chance to profit from this lucrative credit –although they need to start planning as soon as possible. With the New Year now upon us and given these changes to the credit, now is the time to invest in R&D and reap the benefits of this opportunity this current year. A tax professional, such as Swanson Reed, with R&D tax credit expertise can assist businesses with qualifying for and claiming the credit. Contact us today to find out if your startup or small and medium-sized company can benefit from the improved permanent R&D tax credit.
Not sure of the benefits of R&D? Check out our previous blogs: How the R&D Tax Credit Permanent Boost the U.S. Gross Domestic Product (GDP), and Don’t Hold Back Your Claim: 7 Common Myths about the R&D Tax Credit.