RESEARCH CREDIT ENHANCEMENTS
INCLUDED IN THE PATH ACT
Enhancement 1: Start up companies are able to use the research credits generated in tax years beginning after December 31, 2015 against payroll tax
- What is the definition of a qualified small business (start-up company)?
- A qualified small business is defined, with respect to any taxable year, as a corporation (including an S corporation) or partnership with gross receipts of less than $5 million for the taxable year and no more than 5 years of gross receipts history.
- What part of the payroll tax is refundable?
- The employer OASDI liability of 6.2% is refundable. The credit does not apply against the employee portion.
- Is there a limit to the amount of payroll tax that can be offset with the credit?
- The payroll tax credit is limited to $250,000 per year for no more than five years.
- Are members of the same controlled group treated as a single taxpayer?
- Yes. The amount of the credit is allocated among the members in proportion to each member’s qualified research expenses. Each member may separately elect the payroll tax credit for its portion of the credit.
- How do you elect the payroll tax credit?
- A taxpayer makes an annual election specifying the amount of its research credit that will be applied to its payroll tax, not to exceed the $250,000 limitation. The taxpayer will make the election on or before the due date of its originally filed return, including extensions. The election cannot be revoked without the consent of the Secretary of the Treasury. In the case of a partnership or S Corp, the election to apply the credit against OASDI liability is made at the entity level.
- How is the credit applied against OASDI tax liability?
- The payroll tax is allowed as a credit in the first calendar quarter beginning after the date in which a taxpayer files its tax return for that taxable year. The credit may not exceed the tax liability for a calendar quarter. The excess is allowed as a credit against subsequent calendar quarters until the entire credit amount is used.
Enhancement 2: Small businesses are able to use the research credits generated in tax years beginning after December 31, 2015 against Alternative Minimum Tax
- Who can apply the research credit against AMT?
- An eligible small business can apply the credit against AMT. An eligible small business is defined as either a non publicly-traded organization, a partnership or sole proprietorship whose average gross receipts for the prior three years is less than $50 million.
- Will prior year credits carried forward into 2016 be usable against AMT?
- No. Prior year credits are still subject to the AMT limitation. However, any credits carried forward will be used before any current year credits. To the extent a taxpayer has regular tax due above minimum tax in 2016, the carryforward credit would be used first down to the minimum tax amount, and then the current year credit would be applied against minimum tax.