What you should know about R&D credits: Both the federal and state research and development credits (R&D credit) are in place to reward those companies that develop new products or new processes. We have discussed the potential credits with many clients the past and found that on first blush, they don’t think they qualify because they are not developing a new product. Many business clients are looking for improved processes to more efficiently deliver their product or service and in many cases, they are pleasantly surprised to find out that this too is eligible for the R&D credit.
The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made the R & D credit permanent. In the past, this was a temporary credit and usually part of the annual late extenders provision. The permanent status should new allow businesses to better plan for and implement steps to capture this credit. In addition, for years beginning after 2015, the R&D credit can offset alternative minimum tax (AMT) for eligible small businesses. Eligible small businesses are defined as businesses with less than $50 million of the three-year period prior to the current year.
In addition, the R&D credit for some qualified smaller businesses can be applied against the employers FICA tax liability. Qualified small businesses are defined as companies earning revenue for no more than five years and having $5 million or less of annual gross receipts. There are limitations in place as to how much of the credit can offset payroll tax liability.
Some states have R&D credits; Minnesota is one of those states. The Minnesota R&D credit is non-refundable but any amount not used will carryover for up to 15 years. One of the issues to be aware of is that the Minnesota credit is only eligible for research and development that occurs in Minnesota. Minnesota Revenue audits many of the research and development credit calculations and they look to where the actual research took place as part of the audit process.