The federal research and development (R&D) credit gives companies conducting qualified research the ability to generate a net research tax credit of 15.8 percent in a 21% corporate tax rate environment (11.1 percent under the alternative simplified method) of incremental qualified R&D spending* in order to lower their regular tax bill. This credit can result in significant tax savings for companies in many industries, however, studies have shown that it is surprisingly under-claimed. While nearly $9 billion in R&D credits were claimed in 2010, National Science Foundation1 statistics indicate that another $4 billion in R&D credits could have been claimed but were not. In particular, manufacturing companies that develop new products, make improvements to existing products, and develop or improve manufacturing processes are likely to qualify for the R&D credit. Middle market companies are among those least likely to take advantage of this beneficial credit.
The Protecting Americans from Tax Hikes Act of 2015, signed into law on Dec. 18, 2015, modifies and makes permanent the R&D tax credit. Eligible small businesses may now claim the credit against alternative minimum tax. Additionally, a small business start-up is now able to claim a credit of up to $250,000 against its FICA payroll tax liability if it had less than $5 million in gross receipts for the current taxable year and no gross receipts for any taxable year prior to the five-taxable-year period ending with the current taxable year. These modifications are retroactive to Jan. 1, 2015.
In our experience, many companies that have eligible activity erroneously disqualify themselves from claiming the R&D tax credit because of one or more of the following assumptions: