Having finished the initial round of tax filings for the 2018 tax year, many CPAs have learned that the Tax Cuts and Jobs Act, has resulted in significant impacts to companies and individuals alike. The changes have led to increased revenue in predictable as well as unforeseen ways. The predictable impacts have been accounted for, but the unforeseen impacts have sometimes turned into a bonus to the bottom line.
As predicted, the change to the corporate tax rate has resulted in a significant tax savings to C-Corps. An impact of this change that was not originally foreseen, is that the change in the corporate tax rate has had a major impact on how the Research and Development Tax Credit is adjusted from the gross figure to the net benefit.
Under IRC 280C, the common formula used for calculating the net R&D credit rate utilizes the current corporate tax rate as the rate of adjustment to achieve the credit’s net benefit. The decrease in the C-Corp tax rate subsequently results in an increase in the value of R&D credits. Previously, 35% was subtracted from the gross credit amount, but now 21% will be used for tax year 2018 and forward. Thus, 79% of the gross credit can be utilized rather than the 2017 adjustment amount of 65% of the gross credit. This change is not limited to C-Corps, but instead impacts all entities who benefit from the R&D Credit.
The changes to the net credit adjustment have led to significant benefits across a multitude of industries. To illustrate the benefits, Apex Advisors has selected three client case studies from the most common industries for which we perform studies. Smaller revenue clients were chosen to keep the article relevant to a wider audience.
- Annual Revenue: $5 Million
- Gross Federal Credit: $217,000
- Pre-2018 Net Benefit: $141,050
- 2018 Net Benefit: $171,430
- Resulting Benefit Increase: $30,380
- Annual Revenue: $19 Million
- Gross Federal Credit: $262,000
- Pre-2018 Net Benefit: $170,300
- 2018 Net Benefit: $206,980
- Resulting Benefit Increase: $36,680
- Annual Revenue: $3 Million
- Gross Federal Credit: $493,000
- Pre-2018 Net Benefit: $320,450
- 2018 Net Benefit: $389,470
- Resulting Benefit Increase: $69,020
The passage of the Tax Cuts and Jobs Act reinforces the significance of the R&D Credit. All of the benefits added in 2015 remain unchanged, and the repeal of the corporate AMT and lower tax rate make the R&D Credit a more lucrative and stronger incentive for businesses to innovate and invest in the US. The above illustrated case studies demonstrate these facts.
Staying true to the intent of the credit, the change to the C-Corp tax rate has resulted in each of the case studies above enjoying a revenue increase that offsets the salary associated with hiring an additional employee.