Pittsburgh Technical Council

More Technology Companies to Benefit from an Enhanced R&D Credit

More Technology Companies to Benefit from an Enhanced R&D Credit

Article Published: February 28, 2016

By Scott Schimdt, Black Line Group

Due to recent legislation passed by Congress, significantly more American technology companies are going to benefit from the Research & Development (R&D) tax credit and improve their bottom lines starting in 2016. This includes certain start-up companies that do not even yet have tax liabilities!

A lot of the activities in both hardware and software companies DO qualify for the R&D Tax Credit! For companies that have yet to take advantage of the R&D tax credit, this potentially can mean the creation of immediate and substantial amounts of cash—typically into the tens of thousands of dollars EACH YEAR, and occasionally $100,000 or more!  And, when combined with the great Pennsylvania State R&D Tax Credit, it will provide an opportunity that companies trying to grow their businesses will not be able to pass up!

The Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently extends the Research and Development (“R&D”) Tax Credit for the first time in the credit’s 35 year history.  In addition to being made permanent, the PATH Act includes enhancements to the R&D credit that will prove very advantageous to many companies.

Previously, a big limiting roadblock for many businesses, and particularly shareholders of S corporations and other flow-through entities, was the uncertainty surrounding their ability to use the credits they could generate if they were subject to the alternative minimum tax (AMT).  Now, through a provision in the PATH Act, certain eligible small businesses will be able to use the credits to offset AMT for tax years beginning after December 31, 2015.  (For purposes of this provision, eligible small businesses are defined as those with average sales of less than $50 million over the prior three tax years).

Another provision in the PATH Act allows certain qualified small businesses to utilize the R&D credit to offset their Payroll Tax/FICA liabilities beginning in tax years after December 31, 2015.  These companies must have sales of less than $5 million per year, and the credit is limited to $250,000 for each eligible tax year for no more than 5 years.

One example of a company benefitting from the R&D credit is a software developer of enterprise-level data management and analysis tools.  A project of theirs that qualified for the credit involved developing an application for users to migrate data from existing sites into a new site.  One of the uncertainties they faced was determining how to migrate data from the historical sites, all of which used different database schemas, into the new site in a single migration process.  They experimented with writing the code in various ways; for example, they attempted to write the migration wizard assuming a similar database schema between all sites, tried putting in an error that would be displayed to the user in order to help debug issues, and tried writing the code in a way so that defaults were in place that would catch errors that occurred.  Federal and state tax credits of over $344,000 were identified for this company in 2014; and over $1,329,000 of total credits have been identified over the last six years.

For more information about the R&D Tax Credit and to learn whether your company can generate a meaningful benefit, visit PTC member Black Line Group at www.blacklinegrp.com, or contact Scott Schmidt at scott@blacklinegrp.com or 763-550-0111.

 

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