Last Tuesday, the Senate Committee on Finance voted to approve semi-annual extensions of numerous popular business tax credits and deductions. In all, there were changes to 15 individual credits and deductions, one of which was the R&D tax credit. Luckily, the changes, currently awaiting approval of the House and ultimately the President, make the R&D tax credit an even better opportunity for small businesses.
The Chairman’s modification modifies the research credit by allowing a qualified small business to elect for any taxable year to claim a certain amount of its research credit as a payroll tax credit against its employer Social Security or old age, survivors, and disability insurance (“OASDI”) liability,2 rather than against its income tax liability.3 A qualified small business is defined, with respect to any taxable year, as a corporation (including an S corporation) or partnership (1) with gross receipts of less than $5 million for the taxable year,4 and (2) that did not have gross receipts for any taxable year before the five taxable year period ending with the taxable year.
The payroll tax credit portion is the least of (1) an amount specified by the taxpayer that does not exceed $250,000, (2) the research credit determined for the taxable year, or (3) in the case of a qualified small business other than a partnership or S corporation, the amount of the business credit carryforward under section 39 from the taxable year (determined before the application of this proposal to the taxable year).
The Chairman’s modification also modifies the research credit to provide that, in the case of an eligible small business (as defined in section 38(c)(5)(C)7 ), the research credit determined under section 41 for taxable years beginning after December 31, 2014 is a specified credit. Thus, these research credits of an eligible small business may offset both regular tax and AMT liabilities.
The Chairman’s modification to allow the research credit against FICA taxes is effective for credits determined for taxable years beginning after December 31, 2014. The Chairman’s modification to allow the research credit against AMT is effective for research credits of eligible small businesses determined for taxable years beginning after December 31, 2014, and to carrybacks of such credits.
Previous to these proposed changes, the R&D tax credit was at best a complicated incentive with little value to taxpayers in Alternative Minimum Tax (AMT). With the changes, small businesses with average gross receipts of less than $50M within the 3-taxable-year period preceding the current year are now able to offset both regular and AMT.
In addition, these incentives can now also offset payroll taxes (up to $250,000) for startups that are less than 5 years old which makes the credit much more flexible with regard to offsetting tax liability.
Hopefully, these changes get approved and passed before the end of the year. Rumors say it will take the House until December to sign off though many professionals are stating that this would be a mistake since it would prevent many businesses from planning early to take advantage of the various benefits that the extenders would bring.
The full text of the proposed Tax Extenders bill is available below in our source link.