Starting with the tax year 2016, small businesses will be able to take advantage of expanded federal Research and Development (R&D) credit benefits
first introduced as part of the PATH Act (Protecting Americans from Tax Hikes Act of 2015) that was signed into law on December 18, 2015.
Mark Dunning, lead partner of TaxOps Minimization, recently participated in the AICPA working group charged with submitting comments to the IRS and the United States Department of Treasury (Treasury) to issue
regulations or other guidance regarding:
- Expansion of federal research credit benefits under section 41(h) to offset certain payroll tax liabilities of start-up companies engaged in qualified research activities; and
- Designation of the credit as a “specified credit” that is used to offset the alternative minimum tax (AMT) liability of an eligible small business.
The AICPA committee analyzed the proposed impact of the new law on the ability of taxpayers, especially small businesses, to claim the federal R&D
credit. In a letter dated February 1, 2017, the working group recommended that the IRS and Treasury issue regulations or other guidance to:
- Define “gross receipts” for the purposes of section 41(h);
- Clarify the order of the elections that are made under section 41(h) and section 280C(c)(3);
- Clarify that a taxpayer is eligible to make the section 41(h) election for its current taxable year (i.e., the “credit year”) even if it has greater than $5 million in gross receipts in one or more of the four taxable years immediately preceding the credit year;
- Clarify application of the general business credit carryforward provisions of section 39(a) to the credit authorized by section 3111(f), and the limitation imposed under section 41(h)(2)(C);
- Specify that the section 383 limitation on the section 41 credit does not apply to the credit authorized under section 3111(f);
- Identify the mechanics of the section 3111(f) credit and the applicable penalty regimes that apply in the event of a recapture of the payroll tax credit and provide transitional penalty relief;
- Coordinate the election under section 41(h) with Treasury regulations published in May 2016 regarding Certified Professional Employer Organizations;
- Clarify the applicable dates for which the section 41 credit is a “specified credit” available to offset certain AMT liabilities; and
- Establish automatic consent procedures to revoke the section 41(h) election.
Timing of future guidance uncertain
President Trump put a hold on all new and pending federal regulations on his first day in office, with a White House memorandum ordering federal agencies to subject the regulations to review by incoming secretaries. Without further guidance, small businesses will have difficulty taking advantage of the new changes, even though the Research Credit regulations would simply clarify and define a law that has already passed. We’ll keep you posted on developments as they occur.
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Find out how your business can take advantage of valuable tax savings. Contact Mark Dunning, partner at TaxOps Minimization, at 720.227.0420 or firstname.lastname@example.org.