The new tax law, Protecting Americans from Tax Hikes Act of 2015 (PATH Act), that was signed into law late last year included provisions that resulted in several important incentives for businesses and their owners, especially early stage and start up companies.
At the top of the list is the research and development tax credit (R&D credit) which has been made permanent for the first time. This is a major boon for businesses in many different types of industries that incur research, development and process improvement costs. Since it is a credit, this benefit offsets tax dollar for dollar.
The R&D credit had been a temporary credit since it was first enacted in 1981. The intent of the credit is to encourage businesses to invest in R&D activities. The definition of qualifying activities include a broad spectrum of industries and activities. In addition to traditional research, other qualifying activities can include manufacturing, software development, architecture and engineering, construction, etc.
Since the credit has been only temporary, businesses did not know with certainty from year to year whether the credit would be reinstated. The permanency of the credit is a substantial advantage for businesses since the credit is available to offset the costs associated with R&D investments and allows business to plan for the long term.
The PATH Act has made the R&D tax credit even more valuable by allowing an offset to both the regular and the alternative minimum tax (AMT) liabilities for small businesses. Historically, the credit had limited value if a taxpayer was subject to the AMT. Beginning this year (2016), businesses with less than $50 million in gross receipts can use the credit to reduce AMT.
Another significant change to the R&D credit will dramatically help many early stage companies. Under prior law, the R&D credit was only available if taxpayers generated business profits and incurred tax. The result was that many businesses, especially early stage and startup companies with no current profits, did not benefit from the R&D credit.
Under the new law, certain small businesses may now use the R&D credit to offset payroll taxes. Qualified startup businesses with less than $5 million in gross receipts that have been active for less than six years can use the credit to offset the employer share of FICA taxes. The maximum credit allowed under the startup provision is $250,000 per year for five years. This is a significant incentive because one of the major expenses of early stage companies is payroll so a cash savings on employer FICA tax can be valuable for many startups.
The enhanced ability for more small businesses to use the R&D credit should result in an economic boost to many taxpayers, especially startups, who will now enjoy current cash benefits instead of having to wait until companies generate taxable income to take advantage of the credit savings. Even though the permanent extension of the R&D credit is effective as of January 1, 2015, the additional provisions allowing the credit to reduce AMT and FICA tax are not effective until 2016. It is critical, however, that businesses understand what types of costs are eligible in order to maximize the credit so that proper records can be maintained throughout the year.
Enhanced depreciation write-off
The ability to take an immediate deduction (the 179 deduction) for purchasing qualifying fixed assets such as furniture and equipment was permanently revised upward via the PATH Act. This provision generally allows a business to take an immediate deduction of up to $500,000 for qualifying purchases instead of having to write the cost of the assets off over a number of years. If the provision was not changed, the maximum write off for 2015 would have been $25,000.
This is another example of a law that has been allowed to expire every one or two years leaving business owners unable to plan properly. The retroactive extension means money back for many businesses who made capital investments last year, which is wonderful news.
Bonus depreciation was temporarily reinstated under the PATH Act. The new law allows for a 50 percent write off for the period beginning January 1, 2015, through December 31, 2017. The rate will then begin to phase-out, reducing to 40 percent through December 31, 2018, and to 30 percent through December 31, 2019.
The PATH Act includes several provisions that will help businesses save taxes. Consult your tax professional to ensure that you are taking advantage of all of the tax breaks available.
Crystal is a partner with MCM CPAs & Advisors, a CPA and advisory firm offering expert guidance and beyond the bottom line thinking for today’s public and private businesses. She works with a diverse range of professionals, owners and businesses throughout our region. Her primary areas of expertise include: business and tax advisory, strategic planning, income and estate tax minimization, fraud and forensic analysis, succession planning, wealth enhancement and transfer and consulting related to business acquisition and disposition.
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