CPA & Business Advisory Blog

R&D

R&D Tax Credit Changes Offer Big Opportunities for New and Established Businesses

Congress recently made the R&D tax credit permanent after more than three decades of year-to-year uncertainty. That’s great news by itself. But there’s more: namely, a new $250,000 payroll offset provision which will finally allow start-ups and early-stage companies to reap the benefits of this prized business credit.

On March 10, local startups and small businesses will get an opportunity to learn about the R&D tax credit and gain insights on strategies to benefit from it during an interactive Q&A session sponsored by BioEnterprise (see below for more details).

At Skoda Minotti, we’ve been talking about R&D credits for years as a great tool for entrepreneurs to use in their efforts to fund exciting new ventures. With that in mind, this new tax credit deal is a big deal, not only for early-stage businesses, but businesses of nearly any size. The deal not only makes the R&D tax credit permanent (a long-overdue measure), but also includes two key changes:

  • First, the legislation enacted by Congress allows small businesses to take the R&D tax credit against their Alternative Minimum Tax (AMT). This AMT “turnoff”, which applies to businesses with less than $50 million in gross receipts, now opens the door for scores of small businesses to take advantage of the R&D tax credit and save significant cash in doing so – a big deal for new companies that usually don’t have much cash lying around.
  • Second, the legislation allows small businesses to take the R&D tax credit against their payroll taxes for five years, essentially making it refundable.

Why is this big news? Well, the AMT limitation that’s been in place has effectively barred many start-ups and small businesses from using the R&D tax credit to their advantage, even though they may perform the kind of work that qualifies for the tax credit. In a broader sense, many of the most innovative companies in the U.S. haven’t been able to benefit from the R&D tax credit because they’re relatively new; they probably don’t have income to speak of; and they aren’t paying federal income tax—even if they’re paying payroll taxes.

Now, those companies can match credit against their payroll tax. For a company with, say, three employees – all entrepreneurs – they likely pay themselves each a salary, and by leveraging this credit, they can save significantly on payroll taxes.

As mentioned, these changes affect not only start-ups and early-stage companies, but larger companies as well that engage in either process or product R&D. Such R&D expenses relate to activities that are expensed that aren’t directly revenue producing.  Now more than ever it is important to track and report your R&D expenses – even for early-stage companies – to take advantage of these two new tax-saving opportunities.   Now, the greater the R&D expenses, the greater the potential savings.

The March 10 BioEnterprise Q&A session is designed to help attendees learn how the credit works, how startups can claim it, and how to use it as part of their growth strategy. The session is being held at JumpStart, 6701 Carnegie Avenue, Suite 100, Cleveland, Ohio 44103. Registration and networking begin at 8:30 a.m. Register for the session here.

Interested in learning more about how you business can get ahead on tax planning and preparation? Contact Paul Etzler via email or start a conversation by calling 440-449-6800.

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