R&D Tax Credit Receives Facelift and is Made Permanent
January 4, 2016
By Carli McDonald, partner-in-charge of R&D Tax Credit Services
On Friday, Dec. 18, 2015, the federal R&D Tax Credit was finally revamped and made permanent after being extended numerous times since its inception in 1981. Many state R&D Tax Credits rely on the federal R&D Tax Credit, and Georgia is no exception. The decision to extend the federal R&D Tax Credit is particularly important to companies performing R&D activities in Georgia.
The Nitty Gritty:
- Credit made permanent: The R&D Tax Credit expired on Dec. 31, 2014. This new law retroactively applies to Jan. 1, 2015 with no expiration. This means that your company will finally be able to create accurate forecasts and budgets around the R&D Tax Credit.
- Eliminates the AMT requirement: The new R&D Tax Credit law includes an Alternative Minimum Tax (AMT) patch for tax years beginning after Dec. 31, 2015, which will allow companies and individuals paying AMT with less than $50 million in average sales over the prior three years to claim the credit. Currently, many companies and individuals are limited by AMT and are not able to fully utilize their R&D Tax Credit. You will pay less taxes!
- Startups can offset federal payroll tax: In tax years beginning after Dec. 31, 2015, companies with less than $5 million in gross receipts and which are less than five years old will be able to use the credit to offset up to $250,000 in payroll taxes annually. This will allow startup companies to essentially get cash back for their R&D efforts on a federal level, and it will help spawn innovation across the country. This new benefit of the federal R&D Tax Credit is similar to the Georgia payroll tax withholding benefit that has been in place since 2009.
What is the R&D Tax Credit?
The R&D Tax Credit helps companies remain competitive in the marketplace by allowing a dollar-for-dollar reduction of federal and state income taxes owed for qualified expenditures incident to the development or improvement of a product, process, software, formula or invention. The federal R&D Tax Credit can be used to offset federal income taxes to the extent qualified research expenditures exceed a base period amount. Business entities that do not pay federal corporate income tax, such as S-corporations and partnerships, are allowed to “pass-through” their federal R&D Tax Credits to shareholders or partners.
Each state uses a slightly different approach to calculate the R&D Credit. The Georgia R&D Tax Credit can be used to offset up to 50 percent of Georgia income tax and can be carried forward for 10 years. Any excess Georgia R&D Tax Credit can be applied to offset state payroll withholding.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.
About the Author
Carli is the partner-in-charge of R&D Tax Credit Services at Aprio. Carli has dedicated the last five years to performing R&D Tax Credit studies for clients in a variety of industries, with a specialty in the manufacturing and technology industries. She has worked to prepare R&D Tax Credits for companies ranging from startups to Fortune 500 businesses, performing technical interviews with subject matter experts, calculating complex credits and preparing technical reports.