By Lucia Valenzuela
Senior Manager of Specialty Tax Services, LV@hallcpas.com
Gone are the days when only the corporate giants take advantage of lucrative tax saving opportunities. In recent years, federal legislation has expanded eligibility criteria for the Research and Development (R&D) tax credit, providing a level playing field for startups and small businesses to save on their tax bill.
R&D Tax Credit Criteria
The R&D tax credit is a government-sponsored tax incentive that rewards companies for conducting research and development in the United States. The activities defined as R&D in the tax code are broad and encompass much more than activities aimed at obtaining new scientific knowledge. To qualify as R&D, the activities must meet each of the following requirements:
(1) Technological in nature – activities must be based on hard sciences;
(2) Permitted purpose – activities must be intended to develop a new or improved product or process;
(3)Technical uncertainty –activities must be aimed at eliminating uncertainty with respect to the development of a product or process; and
(4) Process of experimentation – activities must involve an iterative or systematic approach of evaluating different alternatives to eliminate uncertainty.
Benefit for Startups and Small Business
Arguably, the most beneficial new guidance affecting eligible small businesses and startups is the option to elect up to $250,000, per year, of their qualifying research expenses to offset the FICA employer portion of their payroll tax. To qualify for the payroll tax election a business must have current year annual gross receipts of less than $5 million and must not have any gross receipts five years prior to the current year claim. The election must be made on a timely filed income tax return, including extensions.
Prior to this guidance, small businesses with eligible research expenses but with little to no income tax liability were not able to monetize the R&D credit. Now, small businesses can capture payroll tax savings of up to $1,250,000, over five years.
New legislation also allows certain taxpayers and eligible small businesses, who are too small to absorb the entire R&D tax credit, to take the credit against their alternative minimum tax (AMT) liability. An eligible small business is defined as a corporation that is not publicly traded, a partnership, or a sole proprietorship with average annual gross receipts not exceeding $50 million for the three taxable years preceding the current taxable year. With the passage of tax reform law in 2017, AMT has been repealed for C corporations beginning in 2018, but remains in place for individuals, including those who have ownership in S corporations or partnership.
Hall & Company CPAs and Consultants, Inc.
Hall & Company professionals bring over 20 years of R&D tax experience to help you file and defend your R&D tax credit claim. We welcome the opportunity to provide your company with a no-cost R&D tax credit eligibility analysis to determine if this tax incentive can help you fuel your company’s growth.