In 2015, two new sets of published tax rules provided several favorable developments for U.S. taxpayers claiming these credits. Many taxpayers, including for example those who developed software interface for third parties to engage in business through the internet, could benefit from these rules.
Proposed treasury regulations, released on January 16, 2015, clarified the types of activities for developing Internal Use Software (IUS) that are eligible for the credit. In addition, the “Protecting Americans from Tax Hikes” Act (PATH Act) enacted on December 18, 2015 established laws that promoted the ability of most taxpayers, including start-up businesses, to claim the credit.
Under the PATH Act, the following provisions were enacted into law:
The Credit is Now Permanent – The R&D credit, which had expired for amounts paid or incurred after December 31, 2014, was retroactively reinstated and made permanent. Fiscal year taxpayers whose tax year ended in 2015 might want to file amended returns to claim the credit for amounts paid or incurred on or after January 1, 2015, and before the end of their fiscal year.
Certain Small Businesses Can Use the Credit to Offset Alternative Minimum Tax – Beginning with the 2016 tax year, eligible small businesses (ESB) and their owners can claim the R&D credit against the alternative minimum tax liability. An ESB includes partnerships, sole proprietorships, and privately held corporations whose average annual gross receipts for the three tax-year period preceding the tax year for claiming the credit does not exceed $50 million.
R&D credits determined for a partnership or S corporation are not treated as ESB R&D credits by any partner or shareholder unless that partner or shareholder also meets the gross receipts test for the tax year in which the credits are claimed.
Certain Small Businesses Can Use the Credit to Offset Payroll Tax – Beginning with the 2016 tax year, a Qualified Small Business (QSB) can elect to use the R&D credit against the employer’s old-age, survivors and disability insurance liability (i.e., FICA taxes). The election can be made for up to five tax years.