Pair of Tax Credits a Windfall for Tech Start-Ups
Credits Can Immediately Offset Payroll and AMT Taxes
The Protecting Americans from Tax Hikes (“PATH”) Act includes a pair of provisions under the Research and Development credit (“R&D tax credit”) that are particularly beneficial for start-ups and small businesses in the technology and life science sectors.
Payroll Tax Credit
PATH enables a qualified small business to elect to claim a certain amount of its R&D tax credit as a payroll tax credit against its employer portion of FICA liability, rather than against its income tax liability. A qualified small business is defined as a corporation, partnership, LLC or individual that has gross receipts of less than $5M in any taxable year and did not have gross receipts for any taxable year preceding the 5-tax-year period ending with the tax year. Gross receipts include all sales (net of returns and allowances), service income, interest, dividends, rents and royalties, and any income from incidental or outside sources.
The credit amount is limited to the lesser of $250,000 per year or the amount of the R&D credit computed on the taxpayer’s income tax return. Any credit that exceeds the amount of the taxpayers FICA tax liability in a given quarter may be carried forward to future quarters. A taxpayer may only claim the election for five years for a maximum credit of $1.25M.
Small businesses and start-ups can now realize the tax benefit of their R&D tax credits immediately, where previously they had to wait years to reach profitability or were precluded entirely.
AMT Tax Credit
The PATH Act now allows certain taxpayers to utilize the credits to offset both regular or AMT for tax credits generated during tax years beginning on or after January 1, 2016. Credits generated in prior years typically will not be eligible to offset AMT, but can continue to be carried forward to offset future regular tax in accordance with previous tax law.
The AMT offset is available only to eligible small businesses, which are a corporation, the stock of which is not publicly traded; a partnership or a sole proprietorship.
The average annual gross receipts of such a corporation, partnership or sole proprietorship for the 3-taxable-year period preceding the taxable year must not exceed $50 million. Any partner or S corporation shareholder claiming a pass-through credit must also meet the gross receipts test for its pass-through credit to be eligible to offset AMT.
“These credits can have an immediate positive impact on the cash flow of early-stage tech and life science companies. This helps CEOs invest back into their businesses and reach profitability sooner,” said John Pennett, Partner-in-Charge of EisnerAmper’s Technology and Life Science groups. “We have clients, as we speak, that are taking advantage of the credits, working toward the $250,000 annual maximum – and it’s making a huge difference for them.”