Cathy Robinson, CPA
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.