As business owners, you may have taken this credit before. But starting in 2016, the IRS is changing up the rules for an even bigger benefit. The IRS created the research tax credit, or R&D tax credit, in 1981 to stimulate the economy and incentivize innovation. It has been so beneficial that in 2015 the IRS made it permanent under the PATH Act. We’ll dive into the changes here, and ensure you know how to qualify.
If you haven’t taken it before, it’s just what it sounds like. The tax credit applies to research and development/improvement of products, services, and processes. Companies across industries benefit from this tax break, and the new change is geared towards startups.
Companies of all sizes were able to utilize the R&D credit, but often found themselves limited, especially if they had not yet generated taxable income or had net operating losses, and didn’t have the tax liability to take the credit, or qualified for the alternative minimum tax, which the R&D tax credit does not offset.
The PATH Act not only made this credit permanent, but made important changes to address the above. It allowed businesses with less than $50 million in gross receipts to offset the credit against AMT liability. And it allowed businesses with less than $5 million in gross receipts to offset up to $250,000 against payroll taxes instead of income tax liability. This is a big advantage, especially to startups and small business owners.
The IRS has released a notice stating even if you already filed, you still have time to opt in for the new choice by filling out Form 6765 and filing an amended return before December 31st, 2017. If you have not filed yet, fill out Form 8974 and attach it to your payroll tax return, such as Form 941.
To qualify, you can’t have any gross receipts before 2012 and cannot be exempt from income taxation. For more information on definitions and qualifiers, see the IRS notice here.
The new change to the R&D credit is a significant cash flow opportunity for small business owners. Especially those geared toward technology, improving an existing product or service, and/or has the goal of disrupting an industry. As the US works to stimulate innovation and the economy, expect some more changes in the coming years. For now, consult your tax professional about filing properly with the new amendment.