fbpx

< Back to Thought Leadership

Research Credit Will Apply to More Taxpayers Thanks to the TCJA

Prior to the new tax law, many taxpayers were limited in their ability to utilize federal tax credits associated with the Research & Experimentation Tax Credit. The Tax Cuts and Jobs Act (TCJA) didn’t change the federal tax credit for “increasing research activities,” but several TCJA provisions have an indirect impact on the credit. As a result, the research credit may be available to some businesses for the first time.

AMT Reform

Previously, corporations subject to alternative minimum tax (AMT) couldn’t offset the research credit against their AMT liability, which erased the benefits of the credit (although they 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 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 to ensure 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 phase-out thresholds. As a result, fewer owners of sole proprietorships and pass-through businesses are subject to AMT, allowing more of them to enjoy the benefits of the research credit too.

More to Consider

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 has been reduced from 35% to 21%, this amount is lower and, therefore, the research credit is higher.

Keep in mind that the TCJA didn’t affect certain research credit 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.

Do Your Research

If your company engages in qualified research activities, now is a good time to revisit the credit to be sure you’re taking full advantage of its benefits. Contact your local Blue & Co. advisor if you have any questions. 

 

Tax Reform Resource Center

Read More Thought Leadership Articles Like what you read? Subscribe to our newsletter. Click Here.

 

New Staff Members from Detroit, Michigan Office smile in outdoor group photo | Blue & Co., LLC Announces New Market Expansion with Mellen, Smith, and Pivoz | Detroit, MI | Detroit, Michigan

Blue & Co., LLC Announces Expansion with Mellen, Smith, and Pivoz

CARMEL, Ind. (November 1, 2024) – Blue & Co., LLC, a top-60 accounting and advisory firm based in Carmel, IN is expanding into Detroit, MI. Effective November 1, 2024, Mellen, […]

Learn More

6 Tips to Help Prepare for 2025 Tax Season

The end of 2024 is quickly approaching, and business owners are once again scrambling to put their companies in the best tax position and minimize tax surprises. The question we […]

Learn More

Section 1557 Nondiscrimination Rule: November 2nd Deadline

The Department of Health and Human Services (HHS) released the Nondiscrimination in Health Programs and Activities final ruling that speaks on Section 1557 of the Affordable Care Act. This ruling […]

Learn More