How The R&D Tax Credit
Has Expanded

How Taxpayers Might Benefit from the R&D Tax Credit

These apply to both individuals and businesses and the changes eliminated many of the eligibility criteria that made it difficult for small businesses and startups to benefit from the credit. Under the PATH Act, eligible small business owners may now claim the R&D Tax Credit based on their Alternative Minimum Tax (AMT) for the tax year. This was once restricted under the previous version of the law.

Eligible small businesses are allowed to apply the credit as a way to offset their AMT. There are some stipulations as to the eligibility criteria of a small business seeking the credit. As per the expanded language, an eligible small business must not be a publicly traded company, nor a partnership or sole proprietorship that has an average annual gross over $50 million over the three previous taxable years to the tax year in which the business is claiming the R&D Tax Credit.

In addition, startup companies are now eligible to claim the R&D Tax Credit but the expanded legislation now makes it a refundable credit for startups that have no federal tax liability and can prove gross receipts totaling under $5 million. The Credit is taken against payroll taxes with a maximum of $250,000 over a period of five years. As of January 2016, small businesses that qualify may apply the R&D Tax Credit against their employers' FICA payroll taxes. But in order for the business to be eligible, it must have less than $5 million in annual gross receipts for under five years.

Most companies are often allowed to claim anywhere from 7% to 10% of their qualifying expenses under the federal R&D Tax Credit. Consider a qualified employee earning $100,000 a year on a W2, he or she may equal a tax savings of as much as $10,000 for an eligible employer.