With Congress permanently extending the research and development (R&D) credit as a result of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), more U.S. businesses may now be eligible for a significant tax savings opportunity based on qualified research expenses. While start-ups and small businesses may see a greater benefit from the changes to the credit, industries such as construction, manufacturing and technology could take advantage of this tax incentive.

Recent Changes to the Credit

Aimed at incentivizing U.S. businesses investing in research and experimentation, the dollar-for-dollar credit against taxes owed or paid was finally made permanent after 16 years of temporary extensions. The PATH Act also broadened the impact of the credit on start-ups and small businesses with two major provisions:

  1. Payroll-tax offset: Qualified small businesses (less than $5 million in gross annual receipts) will now be able to use the credit to offset the FICA employer portion of its payroll tax in 2016 and beyond. However, the maximum credit is capped at up to $250,000, per year for five years.
  2. Alternative Minimum Tax (AMT) relief: Historically, the tax credit could only be used to offset regular tax, which limited small businesses (an average of gross receipts for prior three years under $50 million) that were often subject to AMT. Going forward these businesses will be able to use the credit to offset AMT, removing a major obstacle associated with using the R&D credit, particularly for owners and members of pass-through entities. Some uncertainty still remains how the offset will be applied.

How the Credit Works

Unfortunately, many falsely believe they must have a laboratory or other formal R&D process to qualify for the credit when, in fact, that simply isn’t the case. The key pivotal factor is whether your efforts and intellectual capital designed, considered or actually created something new, or at minimum, incrementally changed something so it is now considered new.

Consider these four questions to determine if your activities potentially qualify for the R&D tax credit:

  1. Does your work involve a new or improved product, process, software, formula, technique or innovation?
  2. Is your work technological in nature, as in the process of experimentation, relies on physical or biological science, engineering or computer science?
  3. Was there technical uncertainty encountered for a given product design or process development?
  4. Does the work call for a process of experimentation to resolve a technical uncertainty?

If you’ve answered yes to the questions above, it is highly likely your business contains qualifying R&D criteria and the Internal Revenue Service owes you money. With a three-year look-back period on the table, which could include a business’ most profitable years, it possibly is a significant amount.

Contact Doeren Mayhew’s dedicated Tax Incentives Group to help evaluate your company’s eligibility and get you the credit you deserve.