Since taking office, President Trump has touted tax reform as a primary objective on his agenda, and recently announced that American businesses can expect cuts to occur before the year is out. He has called for slashing the corporate tax rate from 35 percent to 15 percent, while House Speaker Paul Ryan has proposed a new tax rate of 20 percent. Though the exact percentage is yet to be determined, the clear consensus is that American companies will receive a tax rate reduction very soon. This means businesses eligible for tax deductions or credits should take advantage now, while tax rates are still higher, in order to maximize their impact.
With tax reform no longer a matter of “if” but “when”, the fate of many business incentives is in question. However, one in particular is proving indispensable, being offered on both President Trump’s and Republican lawmakers’ tax proposals. Providing companies with over $12 billion a year in annual tax savings, the federal R&D Tax Credit is the single largest credit available to U.S. businesses. And with the signing of The Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) in December 2015 by former President Obama, which permanently cemented the R&D Tax Credit in the federal tax code, the updated R&D Tax Credit is now more accessible than ever. The PATH Act greatly expands the R&D Tax Credit through two momentous amendments sure to fuel startup disruption and small business growth in Silicon Valley and beyond for years to come.
1. The Startup Provision
Since its inception, one of the profound flaws of the R&D Tax Credit was its exclusion of many of our nation’s most innovative companies, simply because they were not yet profitable and carried no income tax liability. By preventing our nation’s young cutting-edge companies from claiming a credit devised specifically to reward and promote innovation, this colossal oversight stifled innovation and compromised the law’s intended effect.
The new startup provision amendment finally rectifies this problem, and allows the R&D Tax Credit to fulfill its original intent. Now, startups with gross receipts of less than $5 million a year can apply the credit to their payroll tax liability for up to five years, resulting in an annual savings of as much as $250,000. For a startup owner in any innovative sector, that added cash just might be the critical fuel needed to acquire key personnel, fund further R&D, and finally propel your business to takeoff.
Example:
- A tech startup company is eligible for $100,000 of R&D tax credits but has not been around long enough to generate profits for taxable income
- The tech startup has an annual payroll of $2 million, and pays $124,000 in payroll taxes
- With the R&D Tax Credit: $124,000 (payroll tax) – $100,000 (R&D tax credit) = $24,000 in new payroll taxes
- The net gain of $100,000 in added tax savings can be reinvested in the company
2. The AMT Turn-Off
In addition to the startup provision, Congress has permanently eliminated the largest barrier that prevented businesses from utilizing the credit in the past. Small businesses with less than $50 million in gross receipts may now take their R&D Tax Credit against their Alternative Minimum Tax (AMT) liability – enabling job creators from all around the U.S. to claim credits that were previously out of reach.
Together, these expansions in the R&D Tax Credit will net $2 billion in added tax savings for startups and small business owners in the next few years; the removal of the AMT barrier alone may increase small business eligibility by as much as ten times. There’s no way around it, this is the single biggest enhancement to federal tax law for startups in years.
The monetary value of the R&D Tax Credit is substantial, so if you or your clients are startups or small business owners, it is worthwhile to look into this lucrative opportunity and assess qualifying activities with a tax credit specialist. Remember, the definition of “R&D” is much broader than laboratory research. Activities performed by companies in sectors as diverse as computer software, pharmaceuticals, nanotechnology, chemistry, manufacturing, architecture, agriculture, and food processing (to name a few) can qualify.
Don’t miss out on this huge financial opportunity for your or your clients. Contact us today for more information on the R&D Tax Credit and a complimentary preliminary analysis.
