Up until December 2015, the federal R&D tax credit was always temporary and was retroactively extended year after year. However, in December 2015, the federal R&D tax credit was made permanent by The Protecting Americans from Tax Hikes Act of 2015 (“PATH” Act). Now, with the permanency of the credit,  companies are able to plan their long term research and development projects with greater certainty.

Moreover, aside from being made permanent, the R&D Tax Credit was expanded and made more accessible to start-ups and small companies. Firstly, eligible startups with less than $5 million in gross receipts can apply up to $250,000 of their R&D tax credit against their payroll taxes.Read more about the Payroll Tax Benefit here.

Secondly, the newly revamped R&D Tax Credit program now allows eligible small businesses to claim the credit against the Alternative Minimum Tax (“AMT”). Historically, the R&D tax credit had limited worth if a taxpayer was subject to the AMT and it was one of the greatest barriers for small businesses. This modification allows eligible businesses with $50 million and less in gross receipts (based on a three-year average) to apply the R&D tax credit against the AMT liability. Ultimately,  this eliminates a huge hindrance that had blocked many small businesses from obtaining the credit in the past.

Now that the credit is permanent, and consequently more accessible, it may provide more incentives for business executives to contemplate long-term funding of R&D activities as a line item on their financials. The R&D Tax Credit encourages innovation and is a vital incentive for allowing companies to deduct the expense of research, development, and hiring of workers to conduct R&D. To discuss the R&D tax credit further, please contact one of our Specialist R&D Tax Consultants at Texas Tax Credit today.

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