Expanded R&D Tax Credit on the Horizon

In July, Senators Maggie Hassan (Democrat, New Hampshire) and Thom Tillis (Republican, North Carolina) introduced a bill that would expand the research and development (R&D) tax credit. Currently, the R&D tax credit is available in two forms: as a nonrefundable credit to benefit larger and more established businesses, and as a refundable credit to benefit startups and small businesses. Their bill seeks to double the credit for startups by improving their ability to apply for the credit against payroll tax liabilities. The changes represent a greater tax-saving opportunity for qualifying Atlanta and Georgia based companies. While still in Congress, the proposed changes reflect the attitude amongst lawmakers to reward companies for R&D and innovation. To help clients, prospects and others understand the potential of the changes, Wilson Lewis has provided a summary of key points below.

R&D Credit History

The R&D tax credit, which has been around since the 1980s, is a federal incentive that rewards companies for developing new or improved products, technologies, or processes in the US. Congress has expanded the credit multiple times, and even in recent years, we have seen significant changes.

• The Protecting Americans from Tax Hikes (PATH) Act of 2015 made this credit permanent. It also allowed eligible small businesses to use their credit to offset alternative minimum taxes (AMT) or payroll tax liabilities.
• The Tax Cuts and Jobs Act (TCJA) of 2017 repealed the corporate AMT. In prior years, high-grossing businesses were unable to offset AMT liabilities with the R&D credit. When the TCJA removed the corporate AMT, more taxpayers than ever before could take advantage of this tax-saving opportunity.

New Legislation

The bipartisan legislation introduced by Senators Hassan and Tillis (S. 2207) seeks to double the available credit and widen the definition of “eligible small businesses”.

As introduced by the PATH Act, startups are currently eligible for an annual credit of $250,000 for up to five consecutive years if:

1. They have less than $5 million in gross receipts the year they claim the credit, and
2. They have no more than five years of historical gross receipts.

The new legislation seeks to increase the credit from $250,000 to $500,000 and to raise the $5 million gross receipts cap to $10 million.

Currently, this credit is also limited by a business’s Social Security taxes – 6.2% of total wages. The new legislation would add Medicare (1.45%) and unemployment taxes (typically 0.6%) to this limitation, allowing startups to offset up to 8.25% of payroll.

New Calculation

Most startups and small businesses use the “alternative simplified method” to calculate their R&D credit. The alternative simplified method is a 14% credit of the amount by which current year R&D expenses exceed 50% of average R&D expenses for the preceding three years. Brand new businesses that do not have three years of historical data are only allowed a credit worth 6% of current year R&D.

The new legislation hopes to do two things:

1. Increase the “alternative simplified credit” from 14% to 20%, and
2. Allow brand-new businesses to take the full 20% credit (rather than the 6% credit) their very first year. Over the next five years, they can choose to either take a credit worth 10% of current year R&D, or a credit worth 20% of the amount by which current year R&D expenses exceed 50% of its average R&D expenses for the preceding three years.

Contact Us

The R&D tax credit is a powerful tax savings tool for Atlanta companies that qualify to take advantage of it’s saving opportunities. If the proposed legislation makes its way through Congress, it will expand the opportunity for more companies to take advantage of the tax savings. If you have questions about the proposed changes or need assistance with an R&D tax credit claim, Wilson Lewis can help! For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.