Spring 2016 issue of Horizons

The Research & Experimentation Tax Credit, also referred to as the “R&E” or “Research” tax credit, incentivizes companies to invest in people and technology that can lead to growth in revenues and profitability, as well as to promote job retention and expansion.

The credit focuses on three types of expenditures: qualified wages, supply costs and contract research.

Since its inception in the 1980s, the research credit (along with other so-called “tax extenders”) has existed on a renewable basis, usually for two years, but only for one year in 2014. This made it challenging for companies to track the eligible expenditures for the credit, since it was not known if the credit would be in place when it came time to file for it. The Protecting Americans from Tax Hikes Act of 2015 addresses this issue. Along with other business and personal tax incentives, the Research & Experimentation Tax Credit has finally been made permanent; this means the credit will continue to be in effect for 2016 and beyond. 1. Previously (except for a one-time exception in 2010), the research credit could offset “regular” tax, but not the alternative minimum tax (AMT). Although this does not usually affect C corporations, the owners of flow-through entities including S corporations and LLC’s often pay the AMT, and could not utilize these credits (although they could be carried forward for up to 20 years). The new provisions allow eligible small businesses to use research tax credits to offset both the regular tax and AMT. Generally, eligible small businesses are defined as those with average annual gross receipts of less than $50 million for the 3-year period prior to the taxable year. 2. Under the new regulations, a qualified small business may elect to apply the research credit as a payroll tax credit against its OASDI (social security) liability instead of its income tax liability. The research credit can offset up to $250,000 in payroll taxes per year and may be elected up to five times. For this purpose, a qualified small business is defined as a corporation or partnership with gross receipts of less than $5 million for the taxable year, and a company with no gross receipts for any taxable year preceding the five-year taxable period ending with the taxable year. Additionally, there were two significant enhancements to the credit for tax years beginning after December 31, 2015:

RubinBrown’s Research & Experimentation Tax Credit Services Group RubinBrown’s Research & Experimentation Tax Credit Services Group specializes in helping companies take advantage of R&E Tax Credits and developing the processes to continue doing so in the future.

Richard Wile Partner-In-Charge R&E Tax Credit Services Group 314.290.3367 richard.wile@rubinbrown.com

Rich Pickett Manager R&E Tax Credit Services Group 314.678.3610 richard.pickett@rubinbrown.com

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