Time to Revisit the R&D Tax Credit?

The federal research tax credit (R & D credit) has been available for 35 years, but many companies fail to take advantage of its significant cash-flow benefits. Some companies may believe that the credit doesn’t apply to them; that it’s only available to biotech companies or those that conduct laboratory research. In fact, it’s potentially available to any business that invests in developing new products, improving processes or techniques, creating software, and a variety of other innovations.

In addition, some companies may have been turned off by the credit’s historically temporary nature. Although the credit was revived every time it expired, uncertainty over its continued availability made it difficult for companies to incorporate the credit into their long-term tax planning. Finally, many startups and smaller businesses disregarded the R&D credit because they couldn’t take advantage of its benefits. This may be the case because they had no income against which to offset the credit (although it can be carried forward up to 20 years) or because they were subject to alternative minimum tax (AMT), which limits or eliminates the credit’s benefits.

The Protecting Americans from Tax Hikes (PATH) Act of 2015 removed some of these obstacles by:

  • Making the R&D credit permanent
  • Allowing smaller businesses (those with average gross receipts of $50 million or less over the preceding three years) to claim the credit against AMT, and
  • Allowing startup businesses (those in operation for less than five years with less than $5 million in gross receipts) to offset the credit against up to $250,000 in employer-paid payroll taxes.

More recently, the Tax Cuts and Jobs Act (TCJA) of 2017 made it easier for many companies to claim the credit by eliminating corporate AMT and temporarily increasing individual AMT exemptions. Note, however, that for tax years beginning after December 31, 2021, companies will be required to capitalize research expenses and amortize them over five years. This change will have a negative impact on many companies with significant research activities.

In light of these changes, companies that haven’t claimed R&D credits in the past should take another look at the potential benefits of this strategy.