The new permanent R&D credit creates significant opportunities, particularly for businesses that now qualify to take the credit against the alternative minimum tax (AMT) or up to $250,000 against payroll taxes.
The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made the R&D credit permanent for the first time in the credit’s 30-year history. This should give all businesses performing research the confidence to analyze their activities for potential current and future claims. Even more important, the PATH Act included two new provisions opening up the credit to taxpayers that previously may have received little benefit.
- Businesses with $5 million or less in gross receipts in the credit year, which do not have gross receipts outside of the prior five years including the year of the claim, can claim up to $250,000 against payroll taxes. This provision provides a boon for startup companies that may have been reluctant to pursue claims before they began turning a profit.
- Private businesses with $50 million or less in average gross receipts over the past three years can effectively take the credit against the AMT. This may be particularly helpful for companies beginning to turn a profit that have net operating losses (NOLs) from previous years that push them into the AMT.
The IRS has released draft forms for electing and claiming the payroll tax credit, but significant questions still must be resolved through IRS guidance and the final forms. Taxpayers, however, should already be analyzing the rules and preparing to make their claims on timely filed returns for the 2016 tax year.
Payroll tax credit
The payroll tax credit is available for tax years beginning after Dec. 31, 2015, for eligible small businesses that meet two requirements:
- Gross receipts of $5 million or less in the tax year of the claim
No gross receipts for any tax years preceding the last five years including the year of the claim
The credit is $250,000 per year and available for a maximum of five years. The statutory language does not appear to preclude a taxpayer that has had more than $5 million in gross receipts in a past year from claiming the credit as long as current-year receipts are below the threshold and there are no receipts outside the five-year window.
The gross receipts test is performed at the entity level for corporations or partnerships. For sole proprietors, all gross receipts from all trades or businesses are included. Gross receipts for purposes of the provision are defined in reference to the restrictions in Section 448(c)(3), meaning common control and controlled group aggregation rules apply.
But the statute otherwise leaves considerable ambiguity on how gross receipts should be determined. The IRS could rely on regulations under either Section 448 or Section 41. The regulations under 1.41-3(c)(2) provide a de minimis
rule that excludes any gross receipts from years before the first year the taxpayer achieves $25,000 in gross receipts. Also, it is uncertain if income that is derived from grant funding will count as gross receipts. If the de minimis
rule and the exclusion of grant funding are applied to this provision, such rules could extend the five-year gross receipts window for many taxpayers.
The election to take the credit against payroll taxes is made on a timely filed original return and is revocable only with the consent of the Secretary. The credit is then taken against payroll taxes on the next quarterly payroll tax return after the return is filed, and any excess credit can be carried forward to the next quarter. The statute does not specify whether this carryforward can continue through future quarters.
Eligible businesses are allowed to ignore the tentative minimum tax restrictions on their general business credit for the R&D credits for tax years beginning after Dec. 31, 2015. To be eligible, a businesses must satisfy the following requirements:
Organize as a sole proprietorship, partnership or nonpublic corporation
Maintain annual gross receipts of $50 million or less in the three years preceding the year of the claim
The general business credit generally cannot reduce liability below a tentative minimum tax, meaning taxpayers paying AMT don’t usually benefit from it. Only a handful of “specified credits” listed under Section 38(c)(4)(B) are applied separately with a tentative minimum tax of zero, effectively allowing them against the AMT. The R&D credit is now a specified credit for businesses meeting the eligibility requirements described above, meaning it is effectively allowed against AMT.
The definition of gross receipts for the AMT provision brings similar ambiguity, which the IRS must resolve, but like the payroll tax credit, the aggregation rules of Section 448 apply.
The IRS is expected to issue guidance soon before taxpayers can file the first returns to make the payroll tax election or apply the new AMT rules. Guidance should settle many of the outstanding questions about gross receipts, whether a payroll credit can be carried forward indefinitely, and whether an R&D credit that has been converted to a payroll tax credit is limited after an acquisition under Section 383. Although full guidance is not available, taxpayers should begin now to assess their eligibility for the new provisions and prepare the documentation required for an R&D claim. The election for the payroll tax credit must be made on the original return, and it is available for 2016 returns filed early next year.
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