Given the recent passage of the Tax Cuts and Jobs Act, we want to keep you up-to-date on the Act’s impact to the Research and Development (R&D) Tax Credit. While the credit did not technically change, several areas of note are affected:
The Act increased the value of the credit when making a 280C election for tax years 2018 and forward. 280C is the reduced credit election, which is set based on the maximum corporate tax rate. With the change in the corporate tax rate to 21% from 35%, the reduction to the gross credit falls to 21% from 35%, effectively increasing the benefit of the 280C election by over 20%. Keep in mind that the 280C election needs to be made annually on a timely filed return, including extensions.
Several key items related to utilization of the credit also changed:
The PATH Act of 2015 allowed the credit to offset minimum tax for companies with prior average sales of less than $50 million. However, that same relief was not available to larger taxpayers. The Tax Cuts and Jobs Act eliminates corporate AMT starting in 2018, so large C Corps will no longer be limited by minimum tax and will now have greater ability to utilize R&D tax credits.
While AMT was not eliminated for individuals, the exemption and phase out amounts for all tax filers increased significantly. For example, the exemption for married filing jointly increased from $83,800 to $109,400 with the phase out increasing from $159,700 to $1 million, so fewer individual taxpayers will pay AMT. In addition, the $10,000 itemized deduction limitation on state and local taxes will also positively impact an individual’s AMT situation since the add-back for AMT purposes will be significantly lower, especially for taxpayers in high tax states.