The Tax Cuts and Jobs Act (TCJA) didn’t change the federal tax credit for “increasing research activities.” Regardless, several TCJA provisions have an indirect impact on the credit. As a result, the research tax credit may be available to some businesses for the first time.
Previously, corporations subject to alternative minimum tax (AMT) couldn’t offset the research tax credit against their AMT liability. As a result, this would erase the benefits of the credit. (Although, corporations could carry unused research credits forward for up to 20 years and use them in non-AMT years). By eliminating corporate AMT for tax years beginning after 2017, the TCJA removed this obstacle.
Now that the corporate AMT is gone, unused research tax credits from prior tax years can be offset against a corporation’s regular tax liability and may even generate a refund (subject to certain restrictions). So it’s a good idea for corporations to review their research activities in recent years and amend prior returns if necessary. This is to ensure that they claim all the research credits to which they’re entitled.
The TCJA didn’t eliminate individual AMT, but it did increase individuals’ exemption amounts and exemption phaseout thresholds. As a result, fewer owners of sole proprietorships and pass-through businesses are subject to AMT. This allows more of them to enjoy the benefits of the research credit, too.
By reducing corporate and individual tax rates, the TCJA also will increase research credits for many businesses. Why? Because the tax code, to prevent double tax benefits, requires businesses to reduce their deductible research expenses by the amount of the credit.
To avoid this result (which increases taxable income), businesses can elect to reduce the credit by an amount calculated at the highest corporate rate that eliminates the double benefit. Because the highest corporate rate is currently at 21% (previously at 35%), this amount is lower and, therefore, the research credit is higher.
Keep in mind that the TCJA didn’t affect certain research tax credit 2018 benefits for smaller businesses. Pass-through businesses can still claim research credits against AMT if their average gross receipts are $50 million or less. And qualifying start-ups without taxable income can still claim research credits against up to $250,000 in payroll taxes.
If your company engages in qualified research activities, now’s a good time to revisit the research tax credit 2018. You want to make sure you’re taking full advantage of its benefits!