Enhanced Research and Development Benefits to a Small Business

Small business taxpayers may get new benefits in 2016 relating to research and development tax credits.  For tax years beginning after December 31, 2015, an “eligible” small business will now be able to claim the research credit against its alternative minimum tax (AMT) liability as well as its regular tax liability.  In addition, a “qualified” small business may elect to claim a portion of its research credits as a credit against its payroll tax liability rather than its income tax liability.

Eligible Small Business

The PATH Act modified certain taxpayers’ ability to utilize research credits.  The tax rules now allow an “eligible” small business to use research and development tax credits against both the regular and alternative minimum tax.  Previously, a small business was not allowed to apply the credit against AMT. 

So, how do you know if you are an “eligible” small business?  A small business in the eyes of the IRS is really not that small.  An “eligible” small business according to the IRS is a nonpublicly traded corporation, partnership, or a sole proprietorship that has average annual gross receipts for the three preceding tax years that do not exceed $50 million.  Not so small after all.

Qualified Small Business

Furthering encouraging research and development activities of a small business, the PATH Act provides the ability to claim research credits to offset an employer’s payroll tax liability.  For tax years beginning after December 31, 2015, a “qualified” small business can elect to offset a portion of its research credit against its employer FICA tax liability rather than its income tax liability.  A “qualified” small business is defined by much narrower standards than an “eligible” small business.  A “qualified” small business is a corporation or partnership with gross receipts of less than $5 million in the current tax year and no gross receipts in any taxable year preceding the five taxable year period ending with such taxable year.

If you determine that you are a “qualified” small business, the amount elected to be claimed against payroll tax is limited to the lesser of $250,000, the amount of the research credit calculated, or, in the case of a qualified small business other than a partnership or S corporation, the amount of the business credit carryforward from the tax year.

As you can see, a small business undertaking research and development activities may find some additional tax relief from these new provisions.  Most helpful is the ability to offset the AMT tax liability for an “eligible” small business.  The payroll tax relief is much narrower, and mainly benefits a small business in the first five years of operation.

Contact us with questions about the small business research and development tax credit benefits and visit our Tax Services page to learn more about R&D-related services that we offer our clients.