The research and development tax credit was made permanent and enhanced as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015.
The research tax credit has been a temporary credit for over thirty years. Congress allowed it to expire and, recently, would re-enact the credit retroactively for short one or two year periods. Critics of the credit argued that this temporary nature of the credit negated the incentive the credit provided for businesses to invest in research and development. This was true, businesses could not count on Congress deciding to extend the tax credit every year. This significant limitation has now been removed.
The research tax credit was also significantly enhanced. Many businesses that qualified for the credit were not able to take advantage of the research tax credit because of the alternative minimum tax (AMT). The research tax credit only reduced regular tax–not the AMT. Under the new law, businesses with less than $50 million in gross receipts for the prior three years will be able to use the research tax credit to reduce their AMT.
Many businesses that qualified for the credit were also limited by their income. The research tax credit generally has not been a refundable credit. This means that the credit cannot be taken in excess of the tax liability in any one year. Businesses that invest heavily in research may not have taxable income in the current year and may not expect to have taxable income in the foreseeable future. This is particularly true for start-ups and other new businesses. These businesses generally forego taking research tax credits. Under the new law, businesses with less than $5 million in annual gross receipts that have had gross receipts for no more than five years will be able to reduce their employer portion of FICA or employment taxes by up to $250,000 a year. This will allow start-ups to start taking advantage of the research tax credit.
The new law applies for tax years beginning after January 1, 2015.