New legislation allows eligible businesses to offset the R&D credit against alternative minimum tax.
Beginning in 2016, eligible small businesses can claim the R&D credit against the AMT. The ability to offset the credit against AMT removes a significant obstacle previously associated with utilization of R&D credits.
Under the PATH Act of 2015, which made the R&D tax credit permanent, eligible small businesses can use R&D tax credits generated in tax years beginning after December 31, 2015 to offset both tax liabilities above and below tentative minimum tax (TMT). This provides the opportunity to reduce both “regular” and AMT liabilities.
This new “AMT Offset” feature of the R&D tax credit provides a significant advantage to small manufacturers and technology companies, especially those organized as a pass-through (S-Corp and Partnership) whose owners are typically subjected to the AMT.
Sample Case Study
ABC Manufacturing Company is organized as an S-Corp with one shareholder, John. John’s regular tax liability for 2015 is $190,000 and his TMT for 2015 is $180,000. This leaves John with $10K of “AMT Spread,” or the amount of tax above TMT which could be offset by a R&D tax credit. ABC Manufacturing is engaged in qualified research & development activities that are focused on developing new products/processes and improving existing products/processes. The Company’s spend on these activities generates an R&D tax credit of $60,000.
Let’s compare how John’s credits would be utilized under the old rules vs. the new rules:
Additionally, if John had credits generated under the old rules that carry forward into 2016, those credits would be utilized first to offset regular tax before the current credits are utilized to offset TMT, which would allow for greater tax savings.