The R&D Tax Credit, also known as the Credit for Increasing Research Activities, continues to receive positive improvements as a result of changing regulations.
For Life Science companies, depending on your situation, it can apply in two very beneficial ways.
- If you are a Qualified Small Business you can offset a portion of your payroll taxes using the R&D Tax Credit. This is an excellent way for startup companies to monetize their credits rather than waiting for income taxes to be paid at some time in the future.
- If you are a company that is currently or soon to be paying income taxes, you can use these credits to offset current and future income tax liabilities.
- If you are approaching profitability or are profitable and paying income taxes, claiming the R&D Tax Credit is an ideal way to attain true cash benefits for your firm – without diluting shareholder’s investments.
In my previous article I spoke about how Qualified Small Businesses can use the credit to offset payroll taxes. Let’s focus on how companies that are approaching profitability or are profitable and paying income taxes can utilize this valuable credit.
Offsetting Income Taxes:
There have been positive changes under the PATH ACT 2015 as well as Tax Reform. Here are the key things to understand:
- The R&D Tax Credit is a permanent part of the code.
- R&D Tax Credits can be used to offset current or future income tax liabilities.
- There are Federal credits and 38 States have their own version of the R&D tax credit.
- You can go back 3 years to claim the credits
- Unused credits can be carried forward for up to 20 years.
- There is no cap on the amount of credits you can claim.
- Beginning with tax year 2016, eligible small businesses can use the credit to reduce alternative minimum tax (AMT) as well as regular tax. This change has had a profound effect on S-corporations and Limited Liability Corporations (LLC’s).
- For C-Corporations, beginning in tax year 2018 with the cut in corporate tax rates from 35% to 21%, the net cash benefit to the taxpayer will rise from 65% to 79% of the credit, a 21% increase.
- Since under Tax Reform the new law also repeals Corporate AMT provisions, corporate taxpayers who previously would have been subject to AMT limitations can now use the credits to offset federal tax liabilities.
This brief overview of the effects of recent changes to the tax law should be encouragement for all Life Science businesses to consider exploring the R&D Tax Credit as a meaningful part of their tax strategy.
As an R&D Tax specialist, I’m glad to put my 30 years of business experience to work for you and help you take full advantage of the R&D Tax Credit! For an estimate of your R&D Tax Credit visit www.BRSHUB.com/rd-tax-credit-estimator.