March 28, 2023

R&D Tax Credit Update – American Innovation & Jobs Act

The federal Research & Development (R&D) tax credit has been an important savings tool leveraged by businesses since it’s inception in 1981. While it has been modified to permit broader access, the incentive has helped thousands of companies offset the cost of eligible activities. A key aspect of the credit is the ability to claim and deduct eligible expenses in the year incurred. This not only allows companies to experience immediate savings, but provides the funds needed to maintain, or even expand, research activities. In other words, the credit has long been an important savings tool for many engaged in innovation.

Unfortunately, a change in the Tax Cuts & Jobs Act (TCJA) means businesses can no longer immediately deduct eligible expenses but must now amortize over a 5-year period.  The change is expected to have an adverse impact on R&D over the coming years. It is expected to result in the loss of 23,400 R&D jobs in the first five years with a reduction in R&D spending by $4.1B over the same period. To remedy the issue, the American Innovation & Jobs Act was recently introduced in Congress. The legislation not only calls for a reversal of the amortization change but makes other important updates. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Key Provisions in the American Innovation & Jobs Act

• R&D Expense Capitalization – The legislation calls for an elimination of the requirement to capitalize eligible expenses over a five-year period for those claiming the credit under IRC Section 174. It also makes the change permanent and would be retroactive to January 1, 2022.
• Payroll Offset Increase – Under current regulations, a Qualified Small Business may use the R&D tax credit to offset certain payroll taxes. The Inflation Reduction Act recently increased the amount to $500,000 over a five-year period. The legislation calls for the payroll offset to be gradually increased from $500,000 in 2024 to $750,000 by 2023. If passed, this change would significantly expand the savings opportunity available to small companies.
• Qualified Small Business Eligibility – For a company to be considered a “Qualified Small Business” (QSB) there are two criteria that must be met. There must be no prior gross receipts for any taxable year over the previous five, and there must have been less than $5M in gross receipts in the current credit year. This would be changed to increase the limit to $15M or less and extends the no prior gross receipts requirement to 8 years. If passed, this will significantly expand the number of companies eligible to claim the R&D tax credit.
• Credit Calculation Updates – Under current regulations, start-up businesses using the Alternative Simplified Credit (ASC) can only claim a credit of up to 14%. However, the legislation increases this amount to 20%. In addition, for those without any expenses in the prior three years, the calculation would change from 6% of the current year’s expenses to 10%.

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The changes called for in the American Innovation & Jobs Act would mean additional savings for businesses. Since the legislation was only recently introduced it is likely to undergo changes as it works through Congressional review. In any case, it does provide important insight into bi-partisan efforts to change R&D regulations. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.