The end of last week marked an important milestone in the history of the R&D tax credit. On Thursday, the 17th of December, the Tax Extenders bill was approved by Congress after which it made its rounds to the Senate and ultimately to the desk of the President. With the approval of the bill came several huge changes to the R&D credit, all of which are very favorable for taxpayers. The first and arguably most important change was the change in status of the R&D credit which has now become a permanent part of the tax code. Previously, the R&D credit was considered a temporary credit and had been regularly extended since 1981 when it was enacted. In its 30+ year history, the credit was extended 15 times and only lapsed once. With this change, companies are now able to conduct more accurate tax planning which was impossible before because of the uncertainty surrounding extensions.
In addition to this change there have been several changes to the utilization of these credits. The first is that businesses with less than $50MM in gross receipts will now be able to claim the credit against their Alternative Minimum Tax (AMT) liability. This was arguably the single biggest barrier to the credit and it has now been removed. Prior to this change, the credit was not available to offset AMT with the notable exception of the 2010 tax year which provided a one-year-only exception for businesses to utilize their credit regardless of AMT issues. Most detractors that opposed the credit saw it as a big business handout since more than 85% of the billions allocated were used by the biggest companies in the US.
Another change that is sending shock-waves is the new provisions for start up businesses. Since the R&D tax credit was non-refundable and could only offset tax liability that had been generated. This meant that startups would never be able to utilize credits until they generated enough revenue. To allow startups to begin utilizing the credit, there is a new provision that allows business with gross receipts of less than $5MM a year to use the credit to offset their payroll taxes up to $250,000 for up to five years, which could result in up to $1.25MM in overall benefits. The changes to the R&D credit really broaden the reach of the credit itself. In addition, it finally addresses criticism that the credit was created purely for big businesses which up until this point, was not an inaccurate description of the benefit.