Investing in R&D Helps You Grow and Lowers Taxes
posted Jul 29, 2016 by Robert D’Andrea in the Global Tax Blog
KLR’s 2016 Manufacturing Industry Survey Report reveals that 83% of respondents rate innovation as highly important to future growth — and 17% see developing new products and services as their top growth opportunity in 2016.
A third of respondents plan to invest 6% or more of their revenue in research and development (R&D) spending this year in order to achieve their internal growth forecasts. Now innovative manufacturers can budget for these expenditures with greater certainty than in previous years, because the research tax credit has been made permanent and expanded under the Protecting Americans from Tax Hikes (PATH) Act of 2015.
The federal government offers tax incentives to keep U.S. businesses at the forefront of technological innovation and advanced manufacturing. Congress first approved the “temporary” research credit in 1981. Every time the credit was set to expire, Congress renewed it for a year or two, often retroactively. Last year, it was finally made permanent for all businesses and expanded for qualifying “small” companies.
Specifically, if you report $50 million or less in annual gross receipts, you may claim the research credit against alternative minimum tax (AMT) liabilities. Smaller businesses that report less than $5 million in gross annual receipts can even claim the research credit against up to $250,000 in FICA taxes annually for up to five years. Both of these expanded tax breaks for small companies start in 2016.
Research Credit Basics
Unfortunately, claiming the research credit can be confusing. The credit equals the sum of 1) 20% of the excess of annual qualified R&D expenses over a base amount, 2) the university basic research credit, and 3) 20% of the qualified energy research expenses undertaken by an energy research consortium.
The base amount can’t be less than 50% of the annual qualified research expenses. In other words, the minimum credit equals 10% of qualified research expenses (50% of the 20% credit).
Alternatively, you may claim an alternative simplified credit (ASC). Currently, the ASC equals 14% of the amount by which qualified expenses exceed 50% of the average for the three preceding tax years.
Are you planning to invest in R&D expenditures this year? If so, we can help optimize the tax benefits related to these costs. In addition to explaining which expenditures qualify for the research credit, we can evaluate how much of the credit you’re eligible to claim and whether it’s advantageous to use the ASC. Contact KLR’s manufacturing specialists for more information.