What is the Alternative Minimum Tax and How Does it Affect the R&D Tax Credit?

What is the Alternative Minimum Tax (AMT)?

The Alternative Minimum Tax (AMT) is a federal income tax imposed on individuals, corporations, estates and trusts that prevents higher income taxpayers from using certain credits and deductions to significantly lower their tax liability.

“Under the tax law, certain benefits can significantly reduce a taxpayer’s regular tax amount. The AMT sets a limit on those benefits. If the tax benefits would reduce total tax below the AMT limit, the taxpayer must pay the higher Alternative Minimum Tax amount,” as stated by the IRS.

When and Why was the AMT created?

The AMT was created in 1969 when Congress became aware that nearly 200 people with high incomes were legally using so many deductions and tax breaks that their federal income tax due was zero. The AMT was originally created as an attempt to make the tax system fairer.

What are the fundamentals of the AMT?

A person’s taxes are recalculated under a set of AMT rules that differ from regular tax rules. AMT rules disallow certain deductions that make it almost impossible for anyone to avoid being taxed.

Once the deductions are eliminated, the tax is recalculated. If the AMT tax is greater than the regular tax, the taxpayer owes the total of the AMT tax.

The IRS explains that, “the AMT is the excess of the tentative minimum tax (TMT) over the regular tax. Thus, the AMT is owed only if the tentative minimum tax is greater than the regular tax. The TMT is figured separately from the regular tax.”

The AMT is imposed on the adjusted amount of taxable income above a certain threshold.

What are the 2014 Alternative Minimum Taxable Income Thresholds and Exclusions?

  • Single or head of household taxpayers:
    • Threshold: $117,300
    • Exclusion: $52,800
  • Married taxpayers filing jointly:
    • Threshold: $156,500
    • Exclusion: $82,100
  • Married filing separately:
    • Threshold: $78,250
    • Exclusion:  $41,050

How does the AMT Affect the R&D Tax Credit?

AMT can determine whether a taxpayer is put in a refund due or taxes owed status with the IRS when they file for an R&D credit.

The R&D Tax Credit leads to a reduction in expenses which leads to an increase in income which results in an increase in tax liability. The R&D tax credit can only offset  the regular income tax, not the Tentative Minimum Tax. If the taxpayer is already required to pay the AMT, then claiming a R&D tax credit will not yield a tax reduction.

If the taxpayer paying AMT decides to claim the R&D Tax Credit in a previous year through an amended return, then the additional income received from the credit will more than likely result in a higher AMT and regular tax and not a credit or reduction.

 

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ISO 31000 Compliance

Swanson Reed understands security, tax risk management, compliance and audit control are critical to the success of your company’s project. At Swanson Reed pride ourselves in providing quality service with minimal risk to ensure your project receives the highest levels of quality assurance.

Swanson Reed is certified to the International Organization for Standardization (ISO) 31000:2009 Risk Management Standard. As a result of this certification, you can be assured every claim prepared by Swanson Reed and our advisory services have undergone the highest level of risk control and quality assurances.

Risk affecting organizations has immense consequences on the economic, professional, environmental and societal performances. Therefore managing risk efficiently and effectively helps organizations to succeed in risky environments – such as R&D.

The ISO 31000:2009 provide principles, guidelines and processes for effectively managing risk. The use of ISO 31000 can help organizations increase the likelihood of achieving short-term goals and long-term objectives, improve the identification of opportunities and threats and effectively allocate and use resources for risk treatment. This means your R&D tax claim is in the best possible hands.

The ISO provides Swanson Reed with an internationally recognized benchmark from which we can continue to assess and improve our risk management strategies to ensure we’re always providing the best quality assurances for your solutions.

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Renewed R&D Legislation under Obama Administration

Earlier this year US businesses were rewarded generously by The U.S. House of Representatives and Obama Administration with a tasty tax break for companies investing time, money and resources into research and development (R&D).

Whilst the proposal has a long way to go before it becomes law, it does give U.S. businesses a much needed breath of air after a tough economic downturn. Under the Obama Administration the R&D tax credit, which expired at the end of last year will be permanently renewed and increased from 14% to 20% for qualifying R&D activities.

Already, the research credit and related breaks save businesses more than $12 billion a year. It’s an encouraging prospect for those businesses looking to expand research and development activities within their entity.

As early as 2010 Obama called for a $100 billion business tax credit – since then Obama has continued to push to permanently extend R&D credits for businesses, rewarding companies that develop new technologies domestically and preserve American jobs (Washington Post, 2010).

Assistant Secretary for Tax Policy, v Mark Mazur said the changes were made to clear up the confusion involved in the tax benefit scheme.

Mazur said the new rules “are part of our ongoing work to clarify the tax code to provide incentives for businesses that are innovating, increasing our competitiveness and promoting economic growth. They do not expand the definition of research.”

In any case, the best way to achieve the greatest benefits from the tax break is to seek valuable advice from someone in the business.

The Smart Move: Make Temporary Tax Credits Permanent

There is one important tax credit which can be of great benefit to corporations, manufacturers and research laboratories. It is generally known as the US Research and Development Tax Credit and it has been on the books since 1981, with a major revision occurring in 2003. While it is intended to stimulate research and development across a broad range of verticals, it has never been made a permanent law. In 2013, President Obama extended it until the end of 2013, making it retroactive for 2012. Now, there is a growing chorus of executives and congressmen who feel that it should be a permanent part of government policy.

The Two New Proposals Introduced in Congress

Two representatives from California; Rep. Scott Peters (Democrat) and Rep. Julie Brownley (Democrat), introduced in December two proposals that would not only raise the value of the tax credit itself, but also make it permanent. This is certainly a move that would be welcomed by businesses everywhere, as it would take away the uncertainty on a year-to-year basis as to whether some of their activities would qualify for this credit, while also increasing the value of the credit itself. Scott Peters’ proposal would raise the percentage of the credit from the current 14% to 20%, while Brownley’s proposal would actually boost it to 50%. Most would agree that, regardless of the percentage, having a permanent credit for research and development would not only boost innovation, but also allow US companies to more effectively compete in the global marketplace. Its permanence would ensure that they can engage in these activities without fear of getting audited.

The Texas Version of the Research and Development Tax Credit

During the months of May and June, both the state legislature and Governor enacted a new research and development tax credit, known as H.N. 800. This new law would provide companies involved in research and development with two choices for applying for the credit:

  • The Sales Tax Exemption. The company would be exempt from the Texas sales and use tax if a depreciable tangible property was used in qualified research. Additionally, the property would have to be stored, sold or used by someone who is actively engaged in qualified research. In this circumstance, the depreciable tangible personal property would have to have a useful life that is greater than one year.
  • The Franchise Tax Credit. As might be expected, in any taxable year, the company can either choose the Sales Tax Exemption or the Franchise Tax Credit, but not both. The formula for the Franchise Tax Credit is somewhat complex. The credit would be equal to 5% of the difference between the company’s research costs for the taxable year and 50% of the average amount of research that qualifies for this credit over the previous three years. The credit itself cannot be greater than 50% of the franchise tax that would be due during the same taxable year. Additionally, this credit may not be greater than 50% of any other franchise tax due, before taking into consideration any other tax credits. The good news is that if this credit is greater than 50%, any unused amount can be carried forward for up to 20 years.