R&D Tax Credits for Startups, Small-to-Medium Sized Businesses

Federal tax credits for research and development (R&D) aren’t just for large companies performing groundbreaking research. Thanks to the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), businesses of all sizes can benefit from the R&D tax credit. That’s good news for startups and small-to-medium sized businesses, but applicants still need to establish a documentation process and appropriate tracking mechanisms. Is your NYS business able to claim this federal tax credit?
For 35 years, the R&D credit was just a temporary part of the U.S. tax code. The PATH Act made it permanent, and introduced two new provisions that make it easier for businesses to qualify. Today, the federal tax credit is available to companies that are developing or improving products, processes, or software in a variety of industries related to the “hard sciences” such as biology, chemistry, and physics.
For startups, the first new R&D tax provision is what Lisa Kahn Little, a certified public accountant (CPA) and contributing writer for the Albany Business Review, calls “huge.” Before the PATH Act, Kahn explains, early-stage companies weren’t generating enough income to have the requisite federal income tax liability. Starting this year, firms with less than $5 million in gross receipts can apply up to $250,000 against payroll taxes.
For small and medium sized firms, the second tax provision is what Kahn calls “great news” for shareholders of pass-through entities, such as S Corporations, that have an Alternative Minimum Tax (AMT) liability. Under the PATH Act, eligible businesses with $50 million or less in gross receipts (based on a three-year average) can apply the R&D tax credit against the AMT liability.
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