How the New AMT Tax Offset Impacts Small Businesses
Undeniably, the permanency of the Research and Development (R&D) Tax Credit is a game changer for start-ups and small businesses. The newly revamped R&D Tax Credit program, as enacted through the PATH Act, now permits eligible small businesses to claim the credit against the Alternative Minimum Tax (“AMT”) for tax years commencing after December 31, 2015.
Indeed, small to mid -sized business owners are all too familiar with the prodigious “gotcha” called AMT. AMT has a tendency to limit the usage and effectiveness of particular tax deductions and credits. Originally, it was intended to increase taxpayers minimum tax paid in certain instances. Historically, the R&D tax credit had limited worth if a taxpayer was subject to the AMT and it was one of the greatest barriers for small businesses.
However, starting 2016, businesses (and business owners) with less than $50 Million in gross receipts can now offset their AMT tax liability with R&D tax credits.
Thus, this AMT modification facilitates small business owners who are currently subject to AMT to actually utilize the benefit of the R&D Tax Credit. Therefore, they can then use these tax savings to reinvest the saved tax dollars back into their businesses to strengthen R&D efforts and cultivate their companies. Moreover, the amended R&D tax credit allows qualified start-ups to use the credit to offset the employer share of FICA taxes (as we have discussed in Clarifying the New Payroll Tax Offset & An Example of How the New Payroll Tax Offset Works).
Ultimately, the enhanced capability for more small businesses to use the R&D credit should result in an economic boost to many taxpayers. Start-ups, in particular, can now enjoy current cash benefits rather than having to wait until their companies produce taxable income to take advantage of the credit savings.
It is imperative, however, that businesses recognize what kinds of costs are eligible in order to maximize the credit so that appropriate records can be sustained throughout the year. Swanson Reed’s R&D tax professionals are available to discuss the R&D tax credit and the changes in the new PATH Act – contact us today if you would like to know if your company now qualifies.