With the passage of the 2017 Tax Cuts and Jobs Act (TCJA), many clients want to know if the tax benefit of the federal research credit (R&D credit) is still available.
The TCJA did not directly change the general rules related to the R&D credit. The R&D credit is available to taxpayers who develop new or improved products, processes, and formulas. The R&D credit can be used to directly reduce income tax liabilities for C corporations, individual owners of businesses structured as pass-through entities (i.e., S corporations and limited liability companies), and individual proprietors.
In some cases, employers may reduce a portion of their share of payroll taxes for start-up companies. This option may apply during the start-up company’s first 5 revenue years (or earlier, if the company is pre-revenue) if the business’ gross receipts is under $5 million in the year the benefit is claimed.
In the past, corporations subject to the Alternative Minimum Tax (AMT) were only able to benefit from the R&D credit to the extent that regular tax exceeded AMT. Under the TCJA, AMT for C corporations has been repealed, thereby removing the AMT limitation on corporate use of R&D credit benefits.
Since the AMT for individuals was not repealed, the AMT R&D credit limitations still apply to many taxpayers, including S corporation owners and limited liability company members. However, the new rules retain the special exception from the AMT limitation for certain owners of small businesses (i.e., prior 3-year average gross receipts less than $50 million).
Change in tax accounting rules related to research and experimental expenditures
Perhaps the biggest impact on research incentives resulting from the TCJA is disallowance of an immediate deduction for research expenditures.
Under the current tax treatment, taxpayers are allowed to immediately deduct research expenditures under their normal tax accounting method (i.e., cash vs. accrual). Starting in tax years beginning after December 31, 2021, research expenses will be required to be capitalized and amortized over 5 years. This provision could have a severe impact on the tax and cash flow planning for businesses who engage in research activities.
Please contact your Clark Nuber professional or Rene Schaefer to discuss the planning opportunities and benefits of claiming the R&D credit.
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