The recent permanent renewal of the Research Tax Credit (RTC) has expanded opportunities for companies to generate cash. All companies, whether large or small, new or mature, should consider claiming the RTC to lower their tax liability and effective tax rate and increase their cash flow and earnings. A permanent RTC will provide businesses and investors the stability needed to enhance long term planning and decision making. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), enacted in December 2015, should help spur long-term innovation and investment in new and improved ideas.
In addition to being made permanent, the RTC provides two added benefits.
Eligible Small Businesses
Small businesses that are privately held and have $50 million or less in average gross receipts for the three preceding tax years, may utilize the RTC against their Alternative Minimum Tax (AMT). Historically, businesses could only use the RTC to offset ordinary tax liability and only to the extent this liability exceeded their AMT, with one exception to this rule in 2010.
Start-up companies with gross receipts of less than $5 million for the current tax year and no gross receipts for any tax year before the five tax years ending with the current tax year, may utilize the RTC against employer’s payroll tax (i.e., FICA) up to $250,000. This is an important added benefit, as startup companies investing in new technologies often do not pay income taxes.
Prior to 2016, the RTC was less useful to many start-up companies (especially those in taxable loss position) because the RTC would only offset regular income taxes, not payroll tax. The carry back and carry forward feature of the RTC did not mitigate this harsh result because many businesses did not know if they would survive to the next year.
With a permanent RTC, businesses now face a more reliable and predictable future. Moreover, the above changes make the credit more attractive to small businesses and startups.