From Nick Morganti, TGG Consulting CFO
2016 ushers in permanent change to the Research & Development (R&D) Tax Credit moving forward. Previously, it was temporary and had to be reenacted on a yearly basis. Here are a few important items to know about the changes:
• For small business owners (defined as $50 million or less in annual revenues), the AMT (Alternative Minimum Tax) no longer applies.
• For startup companies (defined as $5 million or less in annual revenues), the R&D Tax Credit is often limited by the lack of taxable earnings. Starting in 2016, startups that have R&D related activity, but that lack profitability, may apply the tax credit to payroll taxes ($250,000 cap per year).
o For example, a startup that earns an R&D tax credit in 2016 may apply the credit against 2017 payroll taxes. The mechanics of that process have to be worked out, but essentially the R&D Tax Credit earned in one year can be applied to the payroll taxes due the following year.
Qualified R&D activities are loosely defined, so companies often employ an R&D consultant to help define and document what qualifies. The following activities are specifically excluded from consideration:
• Research conducted after the beginning of commercial operations
• Research adapting an existing product or process to a particular customer’s need
• Duplication of an existing product or process
• Surveys or studies
• Research relating to certain internal-use computer software
• Research conducted outside of the U.S. and its possessions
• Research in the social sciences, arts or humanities
• Research funded by another person or governmental entity
The most common eligible expense is W-2 labor and 1099 services that relate to R&D. Your CPA or internal accounting department should be watching for opportunities and tracking eligible expenditures.
TGG can help you take advantage of tax credits, which will significantly help when you’re scaling a business.
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