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The R&D Tax Credit: Two Exciting New Provisions for “Start-ups” and “Pass-throughs”

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The Research and Development (R&D) tax credit applies to the research and creation of new technologies, products and processes or the improvement of those already in existence. Congress added two new exciting provisions for start-ups and small businesses specifically through the PATH Act of 2015. Need a better understanding of the R&D Credit before learning about the new provisions? Check out our previous post.

Offset of Payroll Taxes:

Great news for start-ups! The R&D credit, beginning in tax year 2016, can be used as a credit against FICA taxes for businesses which have $5 million or less in gross receipts and have no income tax to use the credit against. The maximum credit is capped at $250,000 per year for five years. There are further rules concerning what companies qualify as a start-up and they should consult with their CPA or tax advisor before attempting to use the offset.

Offset to AMT (Alternative Minimum Tax):

Pass-through entity owners can also celebrate. The R&D Credit, which will often flow through to the owners of qualifying small businesses, may use the credit to offset Alternative Minimum Tax (AMT) starting in 2016. The definition of a small business currently stands as a business with average gross receipts for the previous three years of less than $50 million. Many owners of growing and successful pass-through entities have not been able to utilize the R&D credit due to being subject to AMT. In the past, AMT disallowed certain credits and deductions (including the R&D credit) on the owners’ personal tax returns, but this will no longer be the case for 2016 and beyond.

Knowledge of the rules now provides ample opportunity to make decisions that can reduce taxes owed in 2016 and beyond. Start-ups and pass-through entities can utilize these provisions to save tax money on R&D expenditures.

If you have questions about the R&D credit, call Berntson Porter at 425.454.7990 to speak to a tax professional. We’re here to help!