Confused about the recent changes to AMT and the R&D tax credit? BRAYN partner, Justin DiLauro, explains what the new updates mean for tax payers conducting research & development!
Since it is the second decade of the more expansive definition of “R&D” for tax credit purposes, many CPAs and their business clients may already be aware that most businesses in the following industries (especially small to mid-sized businesses) are excellent candidates for significant tax refunds and reductions via federal and state R&D Tax Credits:
- Manufacturing, including “job shops”
- Architecture & Engineering
- Construction & Specialty Sub-Contracting
- Software & High Technology
- Oil & Gas
- And many other industries….
However, while many of these businesses may have been able to generate R&D Tax Credits over the last fifteen or so years, some were plagued with an inability to use such credits due to certain limitations.
Specifically, until very recently and with limited exceptions, businesses could only use federal R&D Tax Credits to offset their net income tax that exceed their “Tentative Minimum Tax” (or “TMT”). If a taxpayer had less tax liability than TMT, they were subject to the dreaded “Alternative Minimum Tax” (or “AMT”) that makes up the difference. This is sometimes described as “being in AMT”, and if you have been in AMT, you were precluded from using any federal R&D Tax Credits that have been generated. While unused credits can be carried back one year and carried forward twenty years, most small businesses subject to this limitation did not ultimately see any benefit, as their AMT situation continued year-after-year.
So, what has changed to alleviate AMT issues?
In December 2015, Congress passed the Protecting Americans from Tax Hikes Act of 2015 (otherwise known as the “PATH Act”).The law accomplished many things, such as extending the Section 179D Energy Efficient Commercial Building Deduction, 45L New Energy Efficient Home Credits, 179 Expensing, and Bonus Depreciation.
Additionally, the PATH Act made the following improvements to the federal R&D Tax Credit:
- Eliminated its expiration, and thereby making it a permanent tax incentive
- Starting with tax years beginning on January 1, 2016 or later:
- Provided for an offset of payroll tax for “Qualified Small Businesses”
- Removed AMT Limitations for “Eligible Small Businesses”
What is an “Eligible Small Business” that no longer faces AMT limitations?
The requirements to be an “Eligible Small Business” (or “ESB”), and therefore not be limited by AMT for R&D Tax Credits starting in 2016, are much more expansive than the “Qualified Small Business” requirements for the payroll tax credits and are as follows:
- Privately-held corporation, partnership, or sole proprietorship, AND
- Average annual gross receipts (“AGR”) for the immediately preceding 3 taxable years is no more than $50,000,000.
Additionally, credits determined with respect to a partnership or S corporation shall not be treated as eligible small business credits by any partner or shareholder unless such partner or shareholder also individually meets the same gross receipts test per above.
What are the practical implications of no more AMT limits?
While there is the removal of the AMT barrier for ESBs, all businesses are still subject to the general limitation for all general business credits – namely, 25% of the regular tax liability that exceeds $25,000. However, as illustrated in the example below, this “25-25” limitation is most often significantly less problematic.
How should you proceed?
While keeping in close consult with an existing CPA or tax return preparer, taxpayers should also consider incorporating the services of a specialty tax incentive provider, like BRAYN Consulting LLC, to assist in identifying and documenting R&D Tax Credits, whether an ESB or not. As with all tax incentive opportunities, BRAYN Consulting LLC provides no cost and no further obligation Phase 1 Assessments for R&D Tax Credits upfront.
To begin a free Phase 1 Assessment, please e-mail us at firstname.lastname@example.org or give us a call at (888) 773-8356.