A discussion with Steven G. Horn, CPA and Tax Partner
“Some Georgia businesses are missing an opportunity to offset up to 50 percent of their Georgia income tax liability. Entrepreneurs, start-ups and small businesses often leave money on the table when they overlook research and development (R&D) tax credits,” says Williams Benator & Libby tax partner, Steve Horn.
“They believe the credits are reserved for companies with on-site labs, are too cumbersome to calculate or are a red flag to the IRS, so they (or their accountants) make the mistake of ignoring them,” Horn said.
The truth is the R&D credits are available to small and mid-size businesses that employ engineers, test or upgrade products, develop formulas or processes, or invent or patent something. R&D credits are commonly used by manufacturers, software developers, engineers, architects, pharmaceutical companies, defense contractors, and food science companies, but many other industries conduct activities that qualify them for the credit, as well.
“The credits can be claimed in one year, but applied to another, meaning they can be transferred to new owners in an acquisition,” said Horn. “Claiming the credit can actually make a company a more attractive target because it demonstrates that they have technology that someone else may want.”
Another reason smaller businesses walk away from these credits is that state and federal decision-makers have made the calculations complicated and difficult to apply. Moreover, the credit has expired and then been extended numerous times by Congress since its creation. However, in December 2015, Congress enhanced the research credit and made it permanent under the 2015 Protecting Americans from Tax Hikes Act (PATH) (H.R.2029) which should open the door for more taxpayers.
The PATH Act created the following provisions that allows some taxpayers to apply the credit to other taxes beginning in 2016:
- Eligible small businesses can apply the credit against regular tax or alternative minimum tax liability. This includes private corporations, partnerships, S-corporations and sole proprietorships with average gross receipts for the three preceding years of less than $50 million.
- Qualified startup small businesses may elect for any taxable year to claim a certain amount of its research credit as a payroll tax credit against its employer Social Security tax liability. This applies to corporations, partnerships, and sole proprietorships with gross receipts under $5 million, but only if they meet a complicated 5-year test of no gross receipts. The tax credit portion cannot exceed $250,000 annually and can be claimed for a maximum of 5 years.
On the state side, Georgia offers an R&D credit for any new or existing business that increases its qualified research spending, including embarking on R&D for the first time or expanding their R&D budget. The credit can offset up to 50% of the Georgia income tax liability after all other credits are taken into account. There is also an option to apply the R&D credit towards the state payroll withholding liability. The portion of the credit that is not used may be carried forward for 10 years, making it valuable to start-ups with no income or tax liability.
If you want to know if R&D tax credits can help your business, contact the tax experts at WBL.