In addition to making the research and development (R&D) tax credit permanent and providing for an R&D payroll tax credit, the Protecting Americans from Tax Hikes (PATH) Act of 2015, provides another key incentive to eligible small businesses for taxable years beginning on or after Jan. 1, 2016. This incentive provides that certain taxpayers can utilize the R&D credit to offset their alternative minimum tax (AMT) liability.
An eligible small business is defined as a non-publicly traded corporation, partnership or sole proprietorship with an average of $50 million or less in gross receipts over the prior three years. Partners and S corporation shareholders must separately satisfy the gross receipts test in order to be eligible for the AMT offset. Any for-profit company meeting the above criteria and that is conducting qualified research defined under IRC Sec. 41 could potentially be eligible for R&D credits and this provision.
For purposes of this measurement, gross receipts are defined under IRC Sec. 448(c)(3) and the related Treasury Regulations. Accordingly, gross receipts include total sales (net of returns and allowances) and all receipts received for services, as well as income from investments, including interest, dividends, rents, royalties and annuities. Gross receipts also includes proceeds from the sale of property (described in IRC Sec. 1221(2)) used in a trade or business, reduced by the adjusted basis in the property.
Prior to the PATH Act, the R&D credit could not reduce a taxpayer’s tax liability below the AMT. As such, many taxpayers, particularly partnerships and S corporations whose partners and shareholders were in AMT, did not claim an R&D credit on their original, timely filed tax return, as they would not be able to monetize the benefit. However, with this new legislation, taxpayers should re-examine their eligibility for the R&D credit benefits. By doing so, taxpayers may bring substantial dollars to their, or their shareholder’s, bottom line.
The new provisions of the R&D credit that provide for the AMT benefit for eligible small businesses are complex, and taxpayers should consult their tax advisors to ensure that the benefit applies to their facts.