The pros and cons of the proposed bills
Like all tax professionals, we at Tax Credits Group are watching Washington D.C. very carefully as Congress considers their tax reform plan; specifically, we are all waiting eagerly to see what, if any impact the final legislation would have on the R&D tax credit.
So, while we can’t speed up time, or be certain of how the final outcome will play out, we can try to help shed some light on the pros and cons of the proposed House and Senate bills as they stand today.
First, the good news; both the House and Senate tax plans preserve the R&D tax credit with no additional modification.
This is great news and a huge win for taxpayers, especially small to midsize businesses who have previously taken advantage of the credit, as they will be able to continue to rely on the benefit in the years to come.
It is also highly likely that the new AMT and Payroll tax offset provisions will remain intact under any final legislation, retaining a great opportunity for certain eligible small businesses to claim the incentive in future years.
Now comes a few potential issues. Despite the preservation of the R&D tax credit, the proposed plans create new limitations to utilization for certain taxpayers impacted by the Alternative Minimum Tax (AMT), and also unfavorably changes to the treatment of R&D expenses under IRC Section 174.
Under current law, with the exception of certain eligible small businesses with less than $50M of gross receipts, the R&D tax credit cannot be used to offset AMT.
This is a critical fact to keep in mind when analyzing the pros and cons of the proposed House and Senate bills, as the treatment of AMT would vary drastically under each.
While the House version proposed terminating AMT altogether, (a potentially huge win for impacted AMT taxpayers looking to claim the credit) the Senate bill proposed to retain it for corporations.
Unfortunately, due to current language in the existing Senate bill, this created what is likely an unintended result within the proposed legislation that would undoubtedly cause major limitations on credit utilization for certain corporations. In fact, under this plan, many large corporations may lose the benefit of the R&D tax credit altogether.
While a major issue indeed, it should be noted that the AMT issue would only impact C-corporations. Any flow-through entities would avoid this scenario in light of the fact that their income is taxed at the individual level.
Treatment of R&D Expenses under Section 174
In both the House and Senate tax bills, there exists a proposed change to the treatment of R&D expenses under Section 174, where costs incurred for R&D would be required to be capitalized and amortized over five years, as opposed to the current law which allows a taxpayer to elect to deduct these expenses in the year incurred.
If this change in law does transpire, it would likely have a major chilling effect on the classification of expenses that are R&D related, and it would grossly limit the overall benefit of the incentive. Further, this proposed change would have a broad impact on taxpayers, as the new requirements would apply to all entity types.
What You Can Do:
While we are certainly excited to see that both the House and Senate recognize the value of the R&D tax credit and its impact on the U.S. economy, we also recognize that the existing bills could create unnecessary new hurdles for many taxpayers.
As such, if you are a corporation who stands to be negatively impacted by the credit due to the change in the AMT provision—or an entity of any type who will be negatively impacted due to the proposed treatment of the 174 deduction—we urge you to contact your U.S. Representative and your Senator to request that he or she fight to remove these harmful provision from any final tax plan.
You can find the listing for your local Congressman here: https://www.house.gov/representatives/find-your-representative
You can find the listing for your local Senator here: https://www.senate.gov/general/contact_information/senators_cfm.cfm
Michael Krajcer is President of Tax Credits Group. He has specialized in the R&D Tax Credit since he started with IRS in 1986 and was the Cleveland large case technical specialist on the issue. Subsequent to his government career, he continued as an expert in the credit area in Big-4 accounting, industry, and with his own national practice. Mike has worked with hundreds of companies throughout the United States and has resolved dozens of IRS and state audits of credit claims.
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