With the passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015, the federal Credit for Increasing Research Activities was made a permanent part of the Internal Revenue Code.1 This credit had previously expired for eligible expenditures made after December 31, 2014.
In addition to the permanent extension, The PATH Act also expanded access to the research credit by allowing certain taxpayers to offset alternative minimum tax liability or payroll tax liability. Eligibility for these two provisions is discussed below.
Alternative Minimum Tax Provisions
Effective for taxable years beginning after December 31, 2015,2 an "eligible small business" may now use its research credit to offset its alternative minimum tax liability.3 An eligible small business must meet the following criteria:4
- It must be a non-publicly-traded corporation, a partnership or a sole proprietorship.
- Its average annual gross receipts for the three preceding taxable years cannot exceed $50 million.
Partners and shareholders of flow-through entities must also meet the gross receipts requirements.
Employment Tax Provisions
The PATH Act also adds a new provision that allows a "qualified small business" to elect to apply up to $250,000 of its research credit against a portion of its employment tax liability.5 A qualified small business is defined by reference to the following gross receipts criteria for any given tax year:6
- The entity's gross receipts for the current taxable year must be less than $5,000,000.
- The entity did not have any gross receipts for any taxable year preceding the five-taxable-year period that ends with the current tax year.
A tax-exempt organization is ineligible for qualified small business treatment.7
For any tax year in which a taxpayer qualifies as such a qualified small business, the taxpayer may elect to apply the research credit against the old age, survivors and disability insurance portion of its Section 3111 employment taxes.8 The election is made on an annual basis, shall specify the amount of credit that is being applied against employment taxes and must be made on or before the due date (including extensions) of the relevant income tax return for the year in which the credit is generated.9
The annual portion of credit elected to be applied against employment taxes is limited to $250,000. A taxpayer may only make the election in up to five taxable years.10
The election to apply the research credit against employment taxes applies to tax years beginning after December 31, 2015.11
1 P.L. 114-113 Section 121(a)(1) eliminated old Internal Revenue Code Section 41(h), which previously stated that Section 41 did not apply to amounts paid or incurred after December 31, 2014.
2 P.L. 114-113 Section 121(d)(2)
3 P.L. 114-113 Section 121(b) amends Code Section 38(c)(4)(B) to include reference to Section 41.
4 Code Section 38(c)(5)(C)
5 P.L. 114-113, Section 121(c) adds new Code Sections 41(h) and 3111(f), which contain the qualified small business provisions.
6 Code Section 41(h)(3)(A)
7 Code Section 41(h)(3)(B)
8 Code Sections 41(h(1) and 3111(f)
9 Code Section 41(h)(4)(A)
10 Code Section 41(h)(4)(B)
11 P.L. 114-113 Section 121(d)(3)
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