Tax Reform and the Federal R&D Tax Credit for Corporations

By Freed Maxick Tax Team on August 30, 2018
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Freed Maxick Tax Team

Tax Credits R&D

Tax Cuts and Jobs Act of 2017 didn’t change the R&D Tax Credit, but the repeal of the corporate Alternative Minimum Tax (AMT) expanded the potential benefit to all corporations that were in AMT.

The Tax Cuts and Jobs Act (TCJA) enacted at the end of 2017 did not make specific changes to the research and development (R&D) tax credit, but one significant change to the corporate tax system could benefit businesses that claim the R&D credit on their returns.

TCJA repealed the corporate alternative minimum tax (AMT) for taxable years beginning after December 31, 2017.  As a result, the new law could make all corporate tax credits and carry forwards, including the R&D credit, more valuable in the next few years. 

Corporate AMT and R&D Tax Credits

Before TCJA, a corporation that was subject to the AMT in one year could take an offsetting AMT credit in subsequent years only to the extent that its regular tax liability exceeded its tentative minimum tax. Some corporations were perennially subject to AMT tax and the AMT credits increased over time and were unusable.

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Refund of AMT Credit Carryforwards. Under the new law, any AMT credit carryforwards that weren’t used before the AMT was repealed can now be used to offset the corporation’s regular tax liability. The credit carried forward can be refunded in an amount equal to 50 percent of the excess of the credit for the tax year over the amount of the credit allowable for the year against regular tax liability. (That increases to 100 percent for tax years beginning in 2021.)

Corporations that have AMT credit carryforwards may now get an additional benefit from the R&D tax credit. To the extent the R&D credit reduces the regular tax liability, it could also accelerate the amount of AMT credit carryforwards that could be refunded during the “50 percent” years.

R&D Tax Credit Application for All Corporations and Not Only Eligible Small Businesses

In a previous blog, we discussed provisions of a 2015 law change that allowed only certain “eligible small businesses” (ESBs) to apply the R&D tax credit against their AMT due. Under current law, it appears that this benefit would apply to all corporations, regardless of whether they previously qualified as ESBs for purposes of deducting the R&D tax credit from their AMT liabilities. In effect, the elimination of the AMT under the TCJA has expanded the benefit to all corporations. The availability of the R&D credit to ESB would still apply to individual partners or S corporation shareholders who are subject to the AMT on their personal returns.

Connect with a Freed Maxick R&D Tax Credit Expert

Calculating and claiming the R&D credit for a corporation is a complicated process, and it’s made even more challenging if your business is carrying forward AMT credits from prior years.

If you have any questions or concerns about how the AMT and the R&D credit affect your personal or business taxes, connect with us by clicking on the button or please call the Freed Maxick Tax Team at 716.847.2651 to discuss your situation.

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