Companies of all industries and sizes can be eligible for the federal R&D credit. As such, the credit is not limited to specific industries or company size. Any company that designs, develops, or improves products, processes, techniques, formulas, inventions, or software may be eligible.
Annually, 16,000+ companies report over $12 Billion in Federal R&D credits with manufacturers claiming over 60% of the total credit claimed.
INDUSTRY |
% |
INDUSTRY |
% |
Manufacturing |
61.77% |
Mining |
0.74% |
Information Technology |
16.60% |
Utilities |
0.48% |
Professional / Tech. Services |
10.14% |
Real Estate |
0.26% |
Retail / Wholesalers |
7.15% |
Construction |
0.23% |
Finance |
2.44% |
Transportation/Warehousing |
0.19% |
A&E firms are part of the Professional / Technical Services category, which comprises more than 10% of the total research credits claimed. Many A&E firms perform activities that qualify for the research credit, but many of these companies have not claimed the R&D Tax Credit in the past due to multiple reasons, such as waiting for it to be extended by congress, or the inability to utilize the credit due the limitation of the Alternative Minimum Tax. Well since the PATH act was passed, there are more reasons to claim the R&D tax credit.
December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (PATH). The passing of the PATH Act has been long awaited by many taxpayers. Some particularly positive changes have occurred with the Research and Development (R&D) Tax Credit, here are some highlights.
Sec. 121(a). Extension and Modification of Research Credit
The provision permanently extends the research credit (and retroactive back to January 1, 2015). Taxpayers no longer have to deal with the regular expirations and the suspense of renewals. The credit is now permanent and can help your A&E firm plan for taxes and calculate estimated tax payments more confidently.
Sec. 121(b) Research Credits allowed against the alternative minimum tax
This change allows an Eligible Small Business (ESB) that satisfies the less than $50 million gross receipts requirement to offset a taxpayer’s regular and AMT liabilities for tax years beginning after 12/31/2015.
An Eligible Small Business (ESB), with respect to any tax year:
- is a corporation (of which the stock is not publicly traded);
- has average annual gross receipts of the corporation, partnership or sole proprietorship for the 3 years preceding the tax year that do not exceed $50 million;
- Also applies at Shareholder and Partner/Member level;
- Controlled Group rules apply to combine Gross Receipts)
This might be the most significant change in the PATH Act for many businesses and their ability to utilize the research credits that they generate. Now, instead of a carryforward, taxpayers can utilize the credit and see immediate tax savings.
Sec. 121(c) Payroll tax benefit for start-up companies
This change allows a Qualified Small Business (QSB) to claim the credit against their payroll taxes up to $250,000 in a single year.
A QSB is a business that is:
- A corporation or partnership
- Has gross receipts of less than $5 Million (short tax years must be annualized)
- Has no gross receipts for more than 5 years prior to current tax year end (i.e. no gross receipts before 1/1/2012 for a company with a 12/31/2016 current tax year end)
So, if you are part of an A&E firm that has activities that qualify for the research credit, now is the time to claim it. Don't wait for it to be extended, there are no more limitations by the Alternative Minimum Tax. The PATH Act has created many more reasons to claim the R&D tax credit.
For more information about what tax credits are available in your area, find your state on the map below.