Tag Archives: TCJA

Section 41 Research Credit Preserved in New 2017 “TCJA” Tax Overhaul Bill

A special message from our founder

Highlights:

  • The Section 41 Research Credit is Preserved
  • Manufacturers, Software Houses and Others are Eligible
  • The Federal Credit Fosters Economic Growth Under TCJA
  • Both Corporations and Pass-Through Entities Benefit from TCJA

Otto Kunz

We have fielded many questions lately about the effect of the new tax legislation, which until recently was called the “Tax Cuts and Jobs Act of 2017”, or “TCJA”. The good news for manufacturers, software companies and other eligible companies is that the Section 41 Research Credit has been preserved, and even strengthened for some taxpayers. Here is some information we hope you find helpful regarding TCJA:

Because of Senate rules relating to the naming of bills, the new law is formally titled: “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”. It may be commonly referred to as the Tax Cuts and Jobs Act or even shorter as the TCJA, so this will likely be a useful search term for more in depth information in regards to it. However, for your own personal research, it may be useful to know the full title of the bill as described above.

Our primary focus here is the federal tax credit for research and development. The program was originally codified in the Internal Revenue Code as Section 44F in 1981 and re-numbered in 1986 as Section 41 as the “Investment Tax Credit for Increasing Research Activities”. It is widely referred to as the “Research Credit”. This popular provision continues to enjoy broad bipartisan support as a cost-effective and forward-thinking way to encourage companies to invest in experimental research and development activities here in the United States. Over more than three decades, the incentives provided under this important program have been shown to lead to increased investment in new and improved technologies.

In turn, many of the companies making those investments have proven to be better able to survive economic downturns and to prosper more robustly during more favorable conditions, ultimately leading to increased profitability and to increased overall tax revenues for the federal government as a result. Over time, the program has largely paid for itself in purely budgetary terms, and has created spin-off benefits in terms of increased employment and related purchases here at home, both by the companies claiming the credit and the employees added to do the needed work.

While many popular tax provisions have been eliminated by TCJA, the new law leaves this important incentive program in place. The most recent changes have broadened the availability of the credit in two important ways. First, small companies and their owners have been allowed to count the credit against the Alternative Minimum Tax (AMT). The new law repeals the corporate AMT, so larger companies will now benefit as well. Second, start-up companies and those with low levels of sales may qualify to claim the credit against employment taxes rather than profits. This provision, which has been in place for a few years now, is also preserved. It allows even unprofitable companies to gain at least some benefit as they continue to develop their technological capabilities.

Many people mistakenly believe that the Research Credit applies only to the invention of new products. While this important element of technological development is certainly qualified, the regulations extend to a far broader range of activities than one might think. For example, improved manufacturing processes also qualify, as long as the development efforts were undertaken in an experimental approach and were intended to overcome technological uncertainty regarding a trade or business of the taxpayer.  Scrap reduction efforts, improved unit cost projects and enhanced worker safety efforts are a few examples of this kind of project. In a similar way, development of improved equipment, tooling, jigs and fixtures can also qualify, as long as the activities were undertaken with a sincere and documented effort to overcome technological uncertainty by means of experimentation. This can also be extended to lean manufacturing efforts in some cases, as long as the efforts undertaken were truly experimental in nature.

The new law provides special benefits to owners of pass-through entities, like S-corporations, partnerships and LLCs. Lower tax rates are available to these owners, and the full amount of the Research Credit remains available to offset the net tax due for the owners of these entities, at least for the next few years.

Summary:

  • Projects eligible for the federal Research Credit include experimental development of
    • new and improved products;
    • new and enhanced manufacturing processes; and
    • related equipment, tooling and fixtures.
  • Many states offer companion credits, but:
    • these are only available for expenses subject to taxation in that state; and
    • are only available up to a portion of the state income tax liability in many cases.

Many state research credit programs mirror or significantly overlap federal rules.

The goal of all of these programs is to help companies to keep engineering and manufacturing jobs here in the United States. Our mission here at TCA is to help as many companies as possible to maintain technological development operations here at home, increasing our national employment base and improving the earning power of our companies and their employees.

Thank you for visiting our site! As always, we are very happy to help with any questions you may have or to clarify any issues you would find helpful! Just call us at 508-842-3232 or send an email directly to me at ottokunz@taxcreditadvisors.com . We look forward to working with you, and to making these important incentives as widely available as possible in order to maximize your benefits!