On December 18, 2015 President Barack Obama signed H.R. 2029, the Protecting Americans from Tax Hikes (PATH) Acty of 2015, which makes the Section 41 Research Credit that had expired on December 31, 2014, a permanent provision of the Internal Revenue Code. The law extends the research credit permanently, retroactive to January 1, 2015. This is a major boon for U.S. companies since the United States was one of the last western countries without a permanent R&D tax credit.
The PATH Act is part of House Amendment #2 to the Senate Amendment to H.R. 2029. Section 121 of this amendment contains several modifications to the R&D Credit.
First, Section 121(a) modifies IRC Section 41 to make the credit permanent. Since 1981, when the R&D Credit was first enacted, it has always been a temporary credit. Congress has always just renewed the credit every one or two years when it expired.
This provision finally changes that.
Section 121(b) goes on to state that IRC 38(c)(4)(B) is amended to allow eligible small businesses to use the R&D Credit against Alternative Minimum Tax (AMT). This means that many companies that previously had no utilization for the R&D Credit will suddenly find it available to them. The test for eligible small businesses for this provision will be the test set out in IRC 38(c)(5)(C) which includes closely held corporations, partnerships, and sole proprietorships if the average annual gross receipts for the three preceding tax years do not exceed $50,000,000. This provision makes the amendment applicable in perpetuity.
Section 121(c) of the bill adds a new section to IRC 41 stating that qualified (not the same as eligible) small businesses will be able to elect to use part of the current year credit, all of the current year credit or even a carryforward credit against its payroll tax. This allows smaller businesses that may not have a lot of income tax liability to still take advantage of the R&D credit.
The credit as permanently extended continues to offer both the regular credit and the alternative simplified credit (ASC) options. This allows taxpayers to have the opportunity to compare the two methods and choose the more favorable by making an annual election on a timely filed return.
Although the PATH Act did not actually change the calculation of the R&D credit, it will make a huge impact on the value of the credit. By making the credit permanent the R&D Credit will become a benefit that companies can reliably count on for years to come. The new law does not change the current one-year carryback or the twenty year carryforward for the unused research credits.