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Tax Tip: Small Business Jobs Act and R&D Tax Credit

February 14, 2011

The general business credits have been around for many years; however, many businesses have not been able to benefit from these credits, primarily due to alternative minimum tax ("AMT limitation").  Under current law, unused general business credits can be carried back first to the preceding taxable year, then carried forward to each of the twenty succeeding taxable years, subject to the AMT limitation.

The Small Business Jobs Act of 2010 should greatly enhance the ability of many businesses to fully enjoy the benefits of their business credits generated in a tax year beginning in 2010.  Under the new law, business credits ("eligible small business credits") generated in tax year 2010 by an eligible small business can be used to offset regular tax and AMT.  Any unused 2010 credits can be carried back five tax years and carried forward 20 years without being subject to the AMT limitation.  Thus, it can offset regular tax and AMT.

Eligible small businesses are businesses that are corporations with non-publicly traded stock, partnerships or sole proprietorships that have average annual gross receipts of $50 million or less for the three years preceding the first tax year beginning in 2010.  For pass-through entities such as S corporations and partnerships, the $50 million gross receipts threshold must be satisfied at the entity level as well as the partner/shareholder level.  Subject to further guidance, it is likely that the gross receipts test at the partner/shareholder level would include a proportionate share of gross receipts from the partnership/S corporation.

Since this favorable tax treatment only applies to business credits generated in a tax year beginning in 2010, eligible small businesses should accelerate their qualified business investment and expenditures to 2010 to maximize the tax benefit of this new provision.

The Research and Development Tax Credit provides cash incentives for companies conducting R&D in the U.S.  These incentives are backed by the IRS, Congress and the current administration in order to stimulate research and development in industries of all sizes.

Recent changes to IRS regulations now provide greater opportunities for small- and mid-sized companies to qualify for the credits.  The R&D credit has existed since 1981; however, prior to December 2001, the requirements necessary to qualify for it were rather difficult to attain.  In late 2001 the IRS issued proposed regulations which were ratified in 2004 and apply retroactively.  These regulations have made it significantly easier to qualify for credits, which have opened the door for eligible taxpayers to look back for potential refund claims for credits for which taxpayers are unaware.  The new regulations make it easier for a broader array of companies to qualify their activities as R&D and provide flexibility in certain record-keeping requirements.

 

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