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Introduction to the Research and Development Tax Credit

Apr 25, 2018

PATH ActBack in December 18, 2015, The Protecting Americans from Tax Hikes (PATH) Act was signed into law. The PATH Act of 2015 made the Research and Development Tax Credit (“R&D”) permanent for the first time in the credit’s 34 year history. The credit is permanent for costs related to qualified activity incurred after December 31, 2014.

How the PATH Act Affects Qualified Businesses

In addition to permanently extending the research credit, the new rules significantly enhance how taxpayers will benefit from their research tax credits, utilizing the following provisions:

  • Eligible Small Businesses may claim the credit against the Alternative Minimum Tax (AMT): Eligible small businesses, defined as those with average sales of less than $50 million over the prior three tax years, can use the credits to offset AMT.
  • Some Start-Up Companies may offset Payroll Taxes with the credit:
    • Certain start-up companies are allowed to utilize the research credit to offset the employer’s payroll tax (i.e., FICA) liabilities.
    • These companies must meet certain criteria, such as having sales of less than $5 million per year. Furthermore, the credit may not exceed $250,000.
It used to be that a large number of eligible companies across the country, particularly S Corporations, didn’t pursue the R&D Tax Credit because AMT prevented them from using the R&D Tax Credits that they could generate. When the PATH Act of 2015 was passed, it created extremely beneficial improvements for businesses.

Who Qualifies?

The definition of “Research and Development” is much broader than most people realize. Here are a few examples:

Companies that make parts for their larger OEM customers, including metal stampers and fabricators, precision machinists, mold builders and plastic injection molders, tool and die makers, often do not know or believe that they are doing R&D, but should evaluate whether they are eligible for the credit. In addition, there can be significant R&D activities related to software development, technology and engineering companies.

Benefits for Businesses

For companies that have yet to take advantage of the R&D tax credit, this potentially can mean the creation of immediate and substantial amounts of cash—typically into the tens of thousands of dollars each year, the reduction of future tax liabilities and improved cash flow.

To learn more about the R&D Tax Credit and Black Line Group’s approach, contact Peter Harrington at 763-746-1291, or via email at peter@blacklinegrp.com.

Watch our 4-minute video on how we saved one client enough to buy a huge piece  of game-changing machinery with the R&D Tax Credit