As changes under the Tax Cuts and Jobs Act (TCJA) are continuously being implemented, one thing remains constant: the IRC 41 Credit for Increasing Research Activities, otherwise known as the R&D Tax Credit.
Although the new tax law maintains the R&D tax credit, there are a couple of new features that businesses need to consider:
New opportunities to utilize credits:
- Under new provisions such as the GILTI tax, “deemed repatriation” tax, “future tax” repatriations of foreign income, along with lower US income tax rates, some US companies will experience a shift in overall tax liabilities.
Long-Term considerations:
- Under the TCJA for tax years after December 31, 2021, a change in the IRC 174 – Research & Experimental Expenditures will require 174 expenditures to be amortized over five years for domestic expenditures or 15 years for foreign expenditures, without regard to abandonment or disposition.
- Software expenditures will also be covered under 174 as required by TCJA.
Other considerations:
- Qualified Small Businesses (QSB) – Valuable for early-stage tech companies, these businesses may elect to apply $250,000 of R&D credits against OASDI (Old Age, Survivor, Disability Insurance) payroll taxes.
- Eligible Small Businesses (ESB) – are no longer Alternative Minimum Tax (AMT)-limited. This will be beneficial for pass-through entities 2017 onwards.
1. For individual pass-through business owners:
- All taxpayers must adjust their net credit rate under IRC Section 280C. The reduced credit rate under 280C will be 21% for calendar year taxpayers starting in 2018. Fiscal year taxpayers must calculate a blended 280C pursuant to IRC Section 15(e).
2. For S-Corp & C-Corp company conversions:
- Consider that any R&D Credit carry-forwards would effectively remain “frozen” in the previous entity or on the individual shareholder/partner level.
- Companies should view options for utilizing credits before making any switches.
3. For companies impacted by the new tax provisions:
- Those who have not considered R&D tax credits in the past might benefit from an evaluation or re-evaluation in light of over all global tax strategy changes.
4. QSB companies – When evaluating for QSB credit opportunities, the following should be considered:
- Qualifications – carefully paying attention to “5 years/$5MM” gross receipt tests.
- Timing – can only be made on an originally-filed return.
- Monetization – QSB cannot be applied against OASDI taxes until a quarter after the federal tax has been filed.
- Long-Term Planning – only available for five tax years.
5. ESB companies – can now apply R&D Tax Credits against Alternative Minimum Tax (AMT) liabilities starting from 2016 moving forward.
While TCJA has presented many planning opportunities and challenges for taxpayers and advisors, the R&D Credit remains a consistent and increasing-valuable option for reducing income tax liabilities.
Our A&M Tax team can assist companies in advising on the following action items:
- For fiscal Year-filers, 280C calculation in accordance with IRC 15(e).
- For entity conversions post-tax reform, evaluate the considerations and effects of R&D Credit carry-forwards.
- For startups, especially if the company might qualify as a QSB, help assess these qualifications and potential benefits before filing income tax returns as QSB credit election can only be made on an original return.
- With the reduction to the 280C rate, the net research credit will increase for most taxpayers. Since the research credit has once again been added to the IRS’s list of “Dirty Dozen” Tax Scams, the frequency of IRS audits will continue to be high. Proper documentation is essential to ensure claimed credits will be sustained.
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