There exists a clear and present disadvantage within the 4 walls of your business. Your competitors are aware of the Research Tax Credit and earning an additional $50,000, on average, in tax credits that are available if you know how to get them.
This is one of the few tax perks of being in the design industry. The Federal Government has established this tax credit for architecture and engineering firms – yet most firms don’t know it exists and don’t even attempt to apply for it.
Even if you have looked into the federal research tax credit in the past, some major changes were implemented to the tax laws.
Many more small businesses can receive tax credits that were not previously able to. It’s time to reconsider what working smarter and not harder actually means in this day of competition.
The tax credit has been around for a long time but was never made permanent or beneficial to small and medium sized A&E firms. In January of 1981, we saw the fully winding down of the cold war and the new Reagan administration looked for ways to reverse the trend of innovative dollars spent in the public sector to the private sector. A key component in this endeavor was enacting what the country knows today as the Federal Research & Development Tax Credit.
For years the credit, first of its kind incepted globally, was widely used by the traditional R&D departments of fortune 1,000 companies for the sole purpose of reducing our high-costs of U.S. innovation and helped jump-start the U.S. private sector spend on technology and innovation. The credit at that time, and up to December 15th of 2015, was never made a formal regulation; always temporary and extended some 17 times since its inception.
While the credit has had exceptionally strong bipartisan support over the last 3 decades, the policy makers have continued to leverage this arena of U.S. tax as one of the strongest political footballs of our time. As such the credit has never been voted on its own accord and it has always been tied to a bag of corporate goodies many will know as the tax extenders.
Because of its temporary status, it has been very hard to plan annual tax strategy, let alone 5 year projections. The incentive has typically only benefitted the larger players and specifically C Corp tax structures while small and mid-size business (the back-bone of our economy) were frustrated by the way the code was written for them.
The other major issue with the credit is the complex and confusing “AMT” or Alternative Minimum Tax problem. Over the past 13 years, percentages as high as 80% of small companies have not been able to take advantage of this highly coveted and lucrative incentive. While there always existed a significant opportunity for refund incentives with smaller firms, they have often had their hopes dashed when viewing the 1040’s limited “spread” of available tax to off-set the credit. The S corps, LLC’s, Partnerships, etc. were not able to benefit.
Well now parity has hit the credit as the congressional intent was when the code was modified in 2001! The end of year 2015 legislative period finally made the Federal Research Tax Credit codified PERMANENTLY in the tax regulations. This finally wipes out the strategic tax planning issues but more importantly, and for those who push the boundaries of innovation in this country, the AMT provision has been removed. What this means for the average A&E firm is that more companies can now qualify at greater levels, and not be obstructed by limited tax spreads as seen in their personal 1040’s.
Also the credit was further enhanced for start-ups, those with less than $5 million in annual revenues, whose early years are all about surviving and have limited federal and state tax liability, and now gives them the ability to off-set up to $250,000 in payroll tax.
Parity has finally reached us. This is going to be, as it has been for the last 3 decades for large corporations, the most strategic tax change for small design firms made by our legislators. Yet many firms will not take advantage of this credit
Dawson Fercho is the partner-founder of Corporate Tax Advisors, Inc. He brings over 20 year of consulting experience, 13 years exclusively focused on the Federal Research Tax Credit, working with the accounting industry and small to mid-size manufacturing, technology, engineering, architecture and construction clients. In his current role for Corporate Tax Advisors, Dawson is responsible for all areas of client service and overseeing CTA’s marketing and business development. Dawson is currently studying for the IRS Special Enrolled Agent Exam giving authority to practice before the Internal Revenue Service in all our nation’s tax arenas including the Research Tax Credit. Prior to CTA, Dawson held numerous senior level management roles with some of the largest technology and communication firms in the country.