With the passage of the 2017 tax reform law, commonly referred to as the Tax Cuts and Jobs Act (TCJA), the alternative minimum tax (AMT) remains in place for individuals, including those who have ownership in S corporations or partnerships. For C corporations, AMT is repealed beginning in 2018.
For certain taxpayers paying AMT, the R&D tax credit offers a unique opportunity for individuals or eligible small businesses (ESBs) to reduce AMT and their overall tax liability. ESBs include nonpublicly-traded corporations, partnerships, or sole proprietors with average annual gross receipts over the prior three years of less than $50 million.
For the tax years listed below, the following entity types may use the R&D tax credit to offset AMT.
2017 Tax Year
2018 Tax Year and Beyond
The usability of the R&D tax credit continues to change. In the past, one of the main limitations on the use of the credit was the AMT, which required companies to pay a minimum federal tax rate, no matter how significant a company’s R&D tax credit.
With the passing of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), ESBs were able to use their R&D tax credits to offset AMT for years starting in 2016. Many small to midsize businesses have been able to reduce their AMT because of this change.
Individuals or ESBs who are subject to AMT can offset regular taxes and AMT using the R&D tax credit. This opportunity allows a significant portion of an ESB’s R&D credit to be monetized.
Example
The following is an example of how the R&D credit could potentially benefit individuals and individuals who have ownership ESBs. In the example, the taxpayer saved an additional $43,750 in taxes by properly claiming the credit.
Individuals and ESBs can apply the R&D credit against AMT. But who’s eligible for the R&D tax credit?
Individuals and businesses across industries can qualify for the R&D credit—often for activities they’re already performing. This can include creating products that are lighter, faster, and less expensive, or more durable, reliable, or precise.
In addition to the development of products, the credit includes certain activities for the development of new processes, such as development of new manufacturing lines, automating processes, and increasing production capabilities.
Eligibility Criteria
To be eligible for the credit, an organization’s R&D expenses must be associated with activities that meet each of the following IRS criteria:
Qualifying Expenses
Many expenses qualify for the R&D tax credit—as long as a company can substantiate the expenses are directly connected to the R&D it’s performing. Eligible expenses include:
To learn more about the R&D tax credit and how you or your business could potentially benefit, contact your Moss Adams professional or visit our R&D Tax Services page.
You can also become a part of the conversation and stay up-to-date on R&D-related news by joining our R&D Tax Credits Forum on LinkedIn.