Marcum 2021 Year-End Tax Guide

PATH ACT

However, all taxpayers (corporate and individual) are subject to a minimum tax requirement specifying that an R&D credit cannot exceed the excess of the taxpayer’s net income tax over 25 percent of the taxpayer’s net regular tax liability above $25,000. C. R&D Expense Capitalization Current R&D accounting methods will remain the same for tax years beginning before January 1, 2022. However, for tax years beginning after December 31, 2021, the TCJA eliminates the option to deduct R&D expenditures currently. The new tax treatment will require taxpayers to capitalize and amortize R&D expenses over five tax years. The TCJA also changed the formal language from “research or experimental expenditures” to “specified research or experimental expenditures,” and added a special rule stating that any amount paid or incurred in connection with the development of software is to be treated as a “specified research or experimental expenditure” and may restrict a company’s ability to deduct software development expenditures post-December 31, 2021. SAFE HARBOR PLANNING OPPORTUNITY On September 25, 2017, the Internal Revenue Service (IRS) Large Business & International (LB&I) division issued a directive providing a “safe harbor” planning opportunity for determining QREs eligible for the research credit. The safe harbor recognizes that taxpayer identification within the guidance provided will be considered qualifying and eligible for R&D credit computation purposes. INTERNAL REVENUE PROPOSED PROCESS CHANGES On October 15, 2021, the IRS issued a Chief Counsel Memorandum (CCM 20214101F) to discuss new guidelines clarifying procedural instructions for eligible taxpayers to claim the R&D tax credit, while reducing the number of disputes over such claims.

A. Payroll Tax Relief The PATH Act allows the R&D income tax credit to be applied against the employer’s 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 gross receipts for the tax year, and no gross receipts for any tax year before the 5- year period ending with the tax year. The payroll credit is limited to $250,000 per year for up to five years, and any unused portion can be carried forward to future years. The tax credit may also be claimed if the business uses a certified Professional Employer Organization (PEO). This provision allows qualified small businesses the ability to utilize the R&D credit against payroll taxes, where they might not have had the opportunity to utilize the credit previously, due to the absence of taxable income. B. Alternative Minimum Tax Relief The PATH Act also permits the R&D credit to offset AMT (Alternative Minimum Tax) for taxpayers with $50 million or less in average annual gross receipts, based on the three preceding tax years. A. Increased Credit Value The TCJA effectively increased all R&D benefits after 2017 by 21 percent, due to an increase in the reduced credit adjustment from 65 percent to 79 percent. B. Alternative Minimum Tax Impact The TCJA eliminated the alternative minimum tax (AMT) for corporate taxpayers. This amendment removed a hurdle that previously prevented some corporate taxpayers from utilizing tax credits. TJCA

MARCUM RECOMMENDATION In addition to the federal R&D tax credit, many states have their own R&D tax credit programs. Effectively leveraging these credits to increase cash flow is beneficial to entities of all sizes.

Contact your Marcum tax professional for assistance in determining eligibility and preparing your application.

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