Changes to the Protecting Americans from Tax Hikes (PATH) Act of 2015

Congress has expanded the credit eligibility and benefits associated with the federal research and development (R&D) tax credits included in the PATH Act of 2015. The original intent of the tax credit was to benefit businesses by offering them a credit against income tax for their research and development expenditures. Through the recent congressional expansion, these credits have been made even more advantageous for startups and small businesses.

For instance, businesses and certain startups with less than $5 million in revenue a year can now use the credit against their payroll taxes, assuming they have had employees engaged in R&D for five years or less. The maximum benefit an eligible company is allowed to claim against payroll taxes each year under the new law is $250,000. The new payroll tax offset is limited to companies that meet these qualifications:

• Have generated gross receipts for five years or less; a company is ineligible if it generated gross receipts prior to 2012
• Had less than $5 million in gross receipts in 2016, and for each subsequent year for which the credit is elected
• Have qualifying research activities and expenditures

In addition, qualified small businesses are now able to use the R&D tax credit to offset the Alternative Minimum Tax (AMT). The AMT has often limited the benefits of the R&D tax credit. Beginning in 2016, companies with less than $50 million in gross receipts will be able to use R&D tax credits to offset the AMT. Listed below are examples of the types of activities and projects most likely to fall under the qualified research category.

• Improving product quality
• Developing second generation or improved products
• Developing products through use of computer-aided design tools
• Tooling and equipment fixture design and development
• Optimizing manufacturing processes
• Designing manufacturing equipment
• Prototyping and three-dimensional modeling
• Designing and developing cost-effect operational processes
• Alternative material testing
• Integrating new materials for improved product performance and manufacturing processes
• Designing and evaluating process alternatives
• Evaluating and determining the most efficient flow of material
• Designing, constructing and testing product prototypes
• Increasing manufacturing capabilities and production capacities
• Achieving compliance with changing emission regulations

Many qualifying businesses fail to take advantage of the R&D tax credit. Due to the 2016 changes to the law, now is an excellent time to consider such possibilities.