2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

Research and Development (R&D) Tax Credit: Applicability and Benefits

ALTERNATIVE MINIMUM TAX (AMT) RELIEF

R&D EXPENSE PLANNING For tax years beginning prior to January 1, 2022, the current R&D accounting methods remain unchanged. However, for tax years beginning after that date, the TCJA eliminates the availability to deduct R&D expenditures currently. Proposed tax treatment will require taxpayers to capitalize and amortize R&D expenses over five tax years. The TCJA also changed the formal language detailing the R&D tax credit from “research or experimental expenditures” to “specified research or experimental expenditures.” It also added a special rule requiring that any amount paid or incurred in connection with the development of software is to be treated as a “specified research or experimental expenditure,” which may restrict a company’s ability to deduct software development expenditures post-December 31, 2021. RECOMMENDATION The PATH ACT and TCJA significantly increased the R&D tax credit’s value and opportunity to evaluate potential credits as a part of taxpayer’s year-end tax planning. Using this credit can help a company’s cash flow by reducing income and/or payroll taxes due. In addition, businesses may be eligible to claim the credit for prior years and take advantage of the opportunity to amend previous returns.

The PATH Act also provided businesses the ability to utilize the R&D credit to offset the Alternative Minimum Tax (AMT) for taxpayers with $50 million or less in average annual gross receipts over the three preceding tax years. (Subsequently, the TCJA eliminated corporate AMT, but this benefit still exists for non-corporate taxpayers.) SUMMARY OF RECENT TAX ACTS AND R&D CREDIT OPPORTUNITIES The PATH Act made the R&D tax credit permanent, providing significant tax relief and clarity for companies utilizing this lucrative tax credit moving forward. Although the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 did not directly impact or change the qualification requirements, the TCJA further enhanced the benefits provided by the PATH Act. The TCJA effectively increased all R&D benefits by expanding the availability. For corporate taxpayers, as noted above, the TCJA eliminated the AMT, thus removing a hurdle that had previously prevented some corporate taxpayers from utilizing credits.