Research Credit Incentives Enhanced and Made Permanent for Tech and Life Science Companies
On December 18, 2015, President Obama signed the Consolidated Appropriations Act, 2016, which included significant federal tax provisions under the Protecting Americans from Tax Hikes Act of 2015 (“The Act”). With The Act, certain significant tax incentives set to expire were extended or made permanent.
Research & Development Credit
The Act retroactively and permanently reinstates the R&D credit for qualified research expenses incurred January 1, 2015 and thereafter. The method in calculating the credit remains unchanged, however, notable additional incentives of the credit now includes the option for certain small businesses with average annual gross receipts of $50 million or less to offset their alternative minimum tax with the credit and the option for certain startup companies (i.e. “qualified small businesses”) to elect to offset up to $250,000 of the credit against their payroll tax (i.e. FICA) liability in-lieu of their income tax liability.
The option to offset AMT and payroll tax will begin in 2016 and thereafter. With respect to the payroll tax credit portion, The Act defines “qualified small businesses” as a corporation (which includes S corps) or partnership with gross receipts less than $5 million in the tax year and did not have gross receipts during the five-year period preceding such tax year. Taxpayers which qualify must affirmatively elect the payroll tax credit on or before the due date of their tax return. The credit is allowed against FICA taxes in the first calendar quarter following the date the taxpayer files their return and payroll tax credit election. Carryover of unused payroll tax credits are permitted. This election is limited to five tax years for a single taxpayer.
This new election is particularly attractive to tech startup companies, which often have substantial research expenses, but may have been precluded from obtaining a current tax benefit under the former R&D credit rules. As a result of The Act, significant current tax benefits can now be derived from the R&D credit by many more tech startups, regardless of profit. Additionally, the fact that the R&D credit was made permanent by The Act gives new and future tech startups more certainty and allows for more flexibility in business planning.
If you have questions or comments regarding this article, please contact Tax Partner, Chris Colyer at firstname.lastname@example.org or 973.994.9400.