The federal Research Credit has been helping manufacturers, software companies and others to keep engineering and manufacturing jobs here in the United States since its inception in 1981. However, it has long had limitations that prevented some taxpayers from gaining the benefits that were intended. For example, those in loss positions or who were subject to the Alternative Minimum Tax could not receive current benefits. In addition, the value of the credit was hampered by relatively high nominal tax rates. Several important changes over the past few years have improved and strengthened the credit for all eligible filers.
Most recently, the Tax Cuts and Jobs Act (TCJA) of 2017 reduced the top tax rate on corporations from 35% to only 21%. It might seem counter-intuitive, but this change has the effect of significantly increasing the dollar-for-dollar value of the original Research Credit from 6.5% net to approximately 9% — a significant jump! Similar improvements have been made to the Alternative Simplified Credit.
Recent provisions under an earlier bill that took effect in 2016 remain in effect under the latest round of changes. Taxpayers who are subject to the Alternative Minimum Tax can use the credit currently. This is particularly important for companies that are organized as pass-through entities such as S-Corporations, Partnerships or Limited Liability Companies. For these organizations, the credits are calculated at the company level and then passed through to the shareholders, partners or members. Those owners can now get immediate benefit from the credits generated by their companies regardless of their AMT position.
Another change is to permit smaller companies with no taxable income to claim the credit against payroll taxes. This is particularly helpful for start-up companies in software, scientific research or other fields, who often incur losses during the first few years of operation. These firms can now realize current benefits even though they have yet to turn a profit.
These changes are very helpful and act to magnify the incentive nature of this well-established program. However, the rules remain a bit complex and can be confusing. Here at Tax Credit Advisors, we stand ready to help you to identify your eligible activities and costs, and to help you prepare the documentation you need in order to claim the credit successfully. We hope to hear from you soon – Contact us today!