2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

RESEARCH AND DEVELOPMENT (R&D) TAX CREDIT: APPLICABILITY AND BENEFITS

SUMMARY OF TCJA IMPACT ON R&D TAX CREDIT OPPORTUNITY The TCJA did not directly impact or change the qualification requirements. However, the TCJA expanded the availability of the R&D tax credit to certain taxpayers by eliminating the alternative minimum tax (AMT) for corporate tax payers. These recent law changes removed hurdles that previously prevented some corporate taxpayers from utilizing credits. However, all taxpayers (corporate and personal) are subject to a minimum tax requirement specifying that a credit cannot exceed the excess of the taxpayer's net income tax over 25% of the taxpayer's net regular tax liability above $25,000. TCJA AND R&D EXPENSE PLANNING The current method for accounting for the R&D credit remains the same for tax years beginning before January 1, 2022. Thereafter, the TCJA eliminates the option to deduct R&D expenditures and will require taxpayers to capitalize and amortize R&D expenses over five tax years. PAYROLL TAX RELIEF The PATH Act of 2015 allowed the R&D credit to be applied against the employer OASDI (Social Security) portion of payroll taxes for qualified small businesses. A qualified small business is defined as one with less than $5 million in revenue in the current tax year and no gross receipts for any tax year prior to the 5- year period ending with the tax year.

The research and development tax credit was created to encourage businesses to invest in creating new or improved business components in order to promote economic growth in the United States. Thousands of companies in diverse industries benefit from this tax incentive. The R&D tax credit provides over $10 billion of tax savings to U.S. businesses annually, although it is underutilized, particularly by small and medium-sized companies. The R&D credit is a federal program and is available to businesses in most industries, including but not limited to: n Manufacturing & Distribution n Construction n Food & Beverage n Cannabis n Consumer Products n Software & Technology n Financial and Professional Services n Healthcare It provides significant benefits to taxpayers with qualifying expenses. Recent changes in law from the Tax Cuts and Jobs Act (TCJA) of 2017 and the 2015 Protecting Americans from Tax Hikes (PATH) Act have made the R&D credit even more lucrative by providing taxpayers potentially larger credits for tax years ending after December 31, 2017. Both acts establish the R&D credit as a very powerful tool to reduce taxpayers’ tax liabilities and increase cash flow.

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