Congress is still wrangling over the fate of the tax extenders – the 52 temporary tax breaks for individuals and businesses that have expired – and time is running out. Luckily, a backup plan is already in place.
Earlier in the week, there was optimism that a deal to make permanent some of the tax benefits might be reached. However, a debate over the Child Tax Credit and indexing it to inflation seems to be the Achilles Heel and could torpedo the entire proposal.
Thanks to the efforts of House Ways and Means Chairman Rep. Kevin Brady (R-Texas), a two-year extender bill has been introduced in case a broader deal fails. The extender bill renews all of the tax breaks for another two years – continuing the same can-kicking process that has been going on for years.
The interesting thing is that the backup bill is more than just an extension. Some business tax credits are proposed to be extended with changes that are actually quite meaningful. In the case of the research and development (R&D) tax credit, the back up extension bill would include the following provisions:
- Increase in the amount of the tax credit calculation from 14% to 20%, using the Alternate Simplified Credit (ASC) method. This is a more than 42% increase in the amount of credits a company would receive.
- For businesses with $50 million or less in gross receipts, allow the federal R&D credit to offset Alternative Minimum Tax (AMT) or payroll tax liability.
Both of these provisions have a major impact for business owners because not only do they increase the size of the tax credit, but they also make it much easier to actually use the credits instead of having credit carryforwards. Many small businesses, especially architecture and engineering firms, are structured as some form of partnership (S corporation, LLP or LLC), and as a result, Alternative Minimum Tax (AMT) issues frequently limit their ability to apply the tax credits that are generated.
With these proposed changes, smaller firms are in a position to suddenly realize tax credits that were previously off limits. Even if Congress is unable to come together on the big prize, a very attractive alternate plan is already in place.