The Research Credit is finally permanent after 30+ years!

On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes (PATH) Act of 2015. This extends many business and individual tax provisions and finally makes permanent the research and development tax credit.

 

What does this mean?

The R&D credit is no longer a "preference" item and is now a permanent credit against Alternative Minimum Tax (AMT) or OACDI payroll taxes. The Act directs the Secretary to write regulations to "reduce the record keeping requirements," which is a big deal when it comes to sustaining these.

 

In the past, if a taxpayer fell into AMT, they had to exclude an R&D credit from the tax liability calculation. This exclusion was the largest obstacle that kept companies from taking advantage of the R&D Credit. In 2016 and going forward, the limitation will no longer be there and the R&D credit can be used to reduce both the Regular and AMT liability calculations for eligible small businesses, meaning companies with less than $50 million in gross receipts. Start-up companies can also apply the credit to offset up to $250,000 in payroll taxes after December 31, 2015. Start-ups are defined as businesses with less than $5 million in gross receipts in the current year and less than five years of historical gross receipts. 

 

A lot of these changes will be supplemented by regulations in the months to come, but so far this should provide stability and certainty to companies and likely will generate more interest in the research credit from "small businesses".