Cathy Robinson, CPA
Principal
Research and development credits were originally
implemented to create jobs and bolster the U.S. position as a leader in
technological development. It is also important to note that the name can be
misleading as the credit not only covers research and product development, but it
also includes new processes, formulas, and software, etc. This effectively
extends the industries commonly thought to benefit from the credit to also
include industries such as software development and construction (i.e., designing
electrical systems, mechanical systems, and testing new building materials,
etc.).
The PATH act retroactively and permanently extended this
credit, which otherwise would have expired prior to 2015. The qualified
research expenses encompass both in-house and contract expenses. The credit is for 20% of current year
qualified spending that exceeds a base amount related to gross receipts in
earlier years and cannot exceed 10% of the total spending in the current year
on qualified research.
The big impact of the research credit is its ability to
be used by eligible small businesses for years beginning after December 31,
2015. In addition, an eligible small
business ($50 million or less in gross receipts) can claim the credit against its
alternative minimum tax liability.
A second benefit added by the PATH Act allows a qualified
small business ($5 million or less in gross receipts) the option to claim a
portion of its research credit as a payroll tax credit against its employer
FICA tax liability versus its income tax
liability. If elected, the payroll
credit can be claimed beginning with the first calendar quarter after the date
on which the small business files its income tax or informational returns for
the tax year.
With the start of the new year, it is a good time to have
a conversation with your tax adviser to determine if you can qualify for this
credit, as well as which option may be most beneficial.
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