Early stage and start-up companies can invest in crucial research and development activities while pocketing significant – and now permanent – tax credits to offset the costs of those investments. The PATH (“Protecting Americans from Tax Hikes”) Act of 2015 allows entrepreneurs to commit significant resources to innovation and receive huge tax benefits even if they don’t make a profit, while no longer worrying about whether they will be able to recoup their R&D costs in the coming tax year.
Prior to the passage of PATH Act in late 2015, the research and development tax credit for small businesses was temporary, to the extent that a tax benefit which had been around for 34 years could be called “temporary.” More appropriately, the R&D tax credit could have been called “unreliable” and “unpredictable.” Since it had to be renewed by Congress every few years, and since there was no guarantee that it would in fact be renewed each time, businesses lived forever unsure about how much their research and development investments would truly cost them.
The PATH Act makes the R&D tax credit permanent, allowing small businesses to make long—term decisions about their R&D investments, knowing that every dollar they spend will come back to them next year in their tax returns. It is also important to remember that the kinds of qualifying activities that can go towards the R&D credit are fairly expansive, and can include such things as manufacturing, software development, engineering, and construction.
In addition to the tax credit being made permanent, the two key benefits of the PATH Act that can save start-ups tens of thousands of dollars each year include:
- No profit necessary/Offset payroll taxes. One of the conundrums previously faced by start-ups when it came to the R&D credit was that it was not available to companies that weren’t generating a business profit or incurring taxes on those profits. This obviously left many early stage companies out in the cold. Now, certain small companies with less than $5 million in gross receipts can use the R&D tax credit to offset their FICA payroll contributions up to $250,000 a year for five years for employees engaged in qualifying R&D work.
- Offset to AMT. Beginning this year, businesses with less than $50 million in gross receipts on average over the previous three years can use the credit to reduce their alternative their minimum tax (AMT) liabilities. Previously, the credit was largely out of reach for companies paying AMT.
The purpose of the PATH Act was to spur growth by start-ups which were on the leading edge of innovation but on the trailing edge of profitability (at least for the moment). If you are a small business owner or early stage investor engaged in research and development activities – even if those activities don’t seem like traditional “R&D” – you should avail yourself of this opportunity and explore how you can pocket this important tax credit.
If you have any questions about how the PATH Act can help your business or have any issues involving accounting for start-ups, please contact us. We welcome the opportunity to assist you.