How the New R&D Credit is Helping Small Businesses with AMT and Payroll Tax Offsets

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AMT Tax Offset

The newly revamped R&D Tax Credit program, as enacted through the PATH Act, now permits eligible small businesses (ESB) to include the R&D credit in the calculation of the Alternative Minimum Tax (“AMT”) for tax years commencing after December 31, 2015.  

An eligible small business for purposes of offsetting AMT is:

A corporation whose stock is not publicly traded, a partnership, or a sole proprietorship whose average annual gross receipts (net of returns & allowances) for the 3-tax-year period preceding the tax year of the credit claimed does not exceed $50 million.  

If the business did not exist for the 3-year period prior to the claim, then the average annual gross receipts should be based on the period in which the business existed.

AMT removes nearly all deductions and credits in calculation of a truly alternative tax that is imposed on taxpayers who exceed certain statutory thresholds.  Without deductions & credits, the affected taxpayers are exposed to a level of taxation that is higher than what would result from following the normal rules.  The PATH Act allows the inclusion of the R&D tax credit in those calculations, and, as such, it is one of the few “safe harbors” against the effects of AMT.   

Thus, this AMT modification assists small business owners who are currently subject to AMT to actually utilize the benefit of the R&D Tax Credit. Therefore, they can then use these tax savings to reinvest the saved tax dollars back into their businesses to strengthen R&D efforts and cultivate their companies.

In addition, partners and shareholders of LLC’s and SCorps can apply their share of the R&D credits, as passed through the K-1 distributions, to their personal returns if BOTH the entity and these individuals pass the gross receipts test described above.  In some softwares, when tax preparers begin to complete the Schedule K-1, they are prompted to select or non-select whether, or not, the distribution satisfies the requirements of an ESB.  Indicate affirmatively.  This prompt may appear in different places in other softwares.  Regardless, the R&D credit can assist these individuals with avoiding AMT in their personal returns.

Moreover, the amended R&D tax credit allows qualified start-ups to use the credit to offset the employer share of FICA taxes as discussed below.

Payroll Tax Offset

Previously, startups with no income tax liabilities could only carry forward R&D credits to a time that income taxes were owed. However, the new R&D tax credit now allows qualified small businesses to elect to use all or a portion of their R&D tax credit to offset the employer portion of payroll taxes, instead of waiting to use the credit against income taxes.

Highlights of the rules:

  • Available for tax years beginning on or after January 1, 2016.  
  • Gross receipts cannot exceed $5 million in the year claimed & zero in all years preceding the four years prior to the year of claim (aka “the five years ending with the current year”).  The law does not specify the threshold applicable to the four years preceding the current year, so certain, conservative assumptions must be made until clarity is provided.   
  • These companies can take a credit against the employer portion of FICA taxes only–other payroll taxes are excluded.
  • Credits used are capped at the lesser of credits earned or $250,000 per year for five years.

To elucidate on the above, these companies can now take a credit against the employer’s portion of FICA taxes.  The FICA tax is the Federal Insurance Contributions Act tax and is a United States federal payroll (or employment) tax imposed on both employees and employers to fund Social Security and Medicare. The former is derived at a rate of 6.2% of gross wages, while the latter is derived at a rate of 1.45% of gross wages, a total of 7.65% of gross wages.  Employees’ paychecks are levied at these rates, and employers pay the same amounts.  Only the employer portion is subject to offset.  

In addition, there is a maximum credit capped at up to $250,000 per each eligible year for five years. The payroll tax offset is effective for 1/1/2016, but not available for 2015 or earlier periods. It is important to note that the total of payroll tax credit claimed does not decrease the amount of deductions permitted for payroll taxes on the tax returns. Furthermore, any unused credit may be carried forward to offset against future payroll tax liabilities.

A “Qualified Small Business” for purposes of the payroll tax credit election is described as a corporation or partnership with under $5 million in annual gross receipts and has no gross receipts preceding five years. Hence, this is particularly valuable for start-up companies, who majority of the time will produce R&D expenses but won’t have a taxable income and aren’t paying federal income taxes.

To provide further clarification, we’ve provided two examples:

Example 1

DEVO, a small tech company founded in 2014, had acquired substantial R&D and payroll expenses in tax year 2015, however no revenue was produced. Since it worked at a loss, DEVO did not claim any R&D Tax Credit in 2015. Moreover, the small company expects 2016’s activities to be comparable with those of 2015.

DEVO’s 2016 Activity

Business Form of the Taxpayer C-Corporation
R&D Tax Credit Eligibility $150,000
Payroll Tax Liability $100,000


Because of the PATH Act, DEVO should secure the $150,000 of R&D Tax Credit in 2016 and elect to offset it against the $100,000 of payroll tax liability and carry forward the remaining $50,000 to offset against future payroll tax liability.

Example 2

DEVO’s 2017 Activity

Business Form of the Taxpayer C-Corporation
R&D Tax Credit Eligibility $200,000
Income Taxes $100,000
Payroll Tax Liability $150,000

In 2017, DEVO started to make a profit. DEVO will apply their $200,000 R&D Tax Credit against their income taxes, leaving $100,000 of the credit remaining. Under the PATH ACT, this remaining credit will be used to offset $100,000 of their $150,000 payroll tax liability.

How To Apply

The IRS recently released Notice 2017-23, which provides interim guidance regarding how eligible businesses can elect the payroll tax offset. To apply, the business must complete and attach Form 6765, Credit for Increasing Research to their income tax return. However, if a business has already filed this tax season, they can still take advantage of the new option. Due to a special rule for the 2016 tax year, businesses that did not originally choose the option can still do so by completing an amended return by December 31, 2017.

To be eligible for the extension, the company must indicate on the top of Form 6765 “FILED PURSUANT TO NOTICE 2017-23,” or attach a statement to its Form 6765 that the form is filed pursuant to Notice 2017-23.

Once the option has been selected, businesses can claim the payroll tax credit by filling out Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities and attaching it to their payroll tax return. The taxpayer filing the employment tax return claiming the credit must provide on Form 8974 the EIN used on the Form 6765 reflecting the election.

For further information on claiming the Payroll Tax Offset or the AMT Tax Offset for small businesses, contact a Swanson Reed tax specialist today.

 

North Carolina R&D project receives $1.47m Grant

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SeaTox Research Inc. and the University of North Caroline Wilmington (UNCW) have collaborated in an R&D study to further develop toxin tests for seafood.

The study has now received a $1.47 million R&D grant, which will provide significant advancement in its ability to detect neurotoxins from harmful algal blooms that make people sick when they eat contaminated fish and shellfish.

The tests are designed to be used by research groups and regulatory agencies to monitor toxin content in fisheries to protect the public from the detrimental effects of neurotoxins.

SeaTox Research Inc. is a biotechnology company located in UNCW’s CREST Research Park. It is involved in assay development and pharmaceutical R&D utilizing materials, originating from the marine environment.

Assay development involves inventing and designing scientific tests, modifying the tests to optimize efficiency and then validating those tests with a large pool of data to determine effectiveness.

The university’s strategic plan includes innovation as one of its core values as this is a commitment to continuous improvement and breakthrough advances to ensure distinctiveness.

To find out more about R&D or to determine whether you may be eligible for an R&D Tax Credit Contact a Swanson Reed specialist to see if you qualify.

Minnesota Researchers Develop Groundbreaking Process

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A groundbreaking one-step, crystal growth process for making ultra-thin layers of material with molecular-sized pores, has been developed by a team of researchers at the University of Minnesota. Researchers demonstrated the use of the material, called zeolite nano-sheets, by making ultra-selective membranes for chemical separations.

This new discovery could  improve the energy-efficiency of chemical separation methods used to make everything from fuels to chemicals and pharmaceuticals.

“Overall, we’ve developed a process for zeolite nano-sheet crystal growth that is faster, simpler, and yields better quality nano-sheets than ever before,” said Michael Tsapatsis, the lead researcher on the study. “Our discovery is another step towards improved energy efficiency in the chemical and petrochemical industries.”

Today, most chemical and petrochemical purification processes are based on heat-driven processes like distillation. These processes are very energy-intensive. For example, chemical separations based on distillation represent nearly 5 percent of the total energy consumption in the United States.

Several companies and researchers are developing more energy-efficient separations based on membranes that can separate molecules based on size and shape. One class of these membranes is based on zeolites, which are silicate crystals that have pores of molecular dimensions. However, the multi-step processes for manufacturing these membranes are costly and difficult to scale up, and commercial production remains a challenge.

The researchers at the University of Minnesota have developed the first-ever, bottom-up process for direct growth of zeolite nano-sheets, which can be used to make high quality molecular sieve membranes. The new material, is only about five nano-meters in thickness, and several micrometers wide. The new nano-sheets also grow in a uniform shape making it much easier to make the membranes used in chemical purification.

Mi Young Jeon, the first author of the study describes the new material as being like tiling a floor with large, uniform tiles compared to small, irregular chips of tile. Jeon explains that uniform-shaped zeolite nano-sheets also make a much higher-quality membrane with surprisingly high separation values that can sieve-out impurities.

The research findings are a big step forward and researchers are looking forward to the future changes the discoveries will make to energy efficiency in chemical and petrochemical industries.

To find out more about R&D or to determine whether you may be eligible for an R&D Tax Credit  Contact a Swanson Reed specialist to see if you qualify.

Navy to conduct drone flight research

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The short-term R&D project, in which unmanned aerial systems (UAS) will be tested, is being conducted by the Office of Naval Research with the Raspet Flight Research Laboratory at Mississippi State University.

According to the office of Naval research, the flight testing to evaluate UAS capabilities will commence at the Stennis Space Center in coastal Mississippi in May and continue through to June. One of the features planned to evaluate are drone-mounted lasers that can measure water depth from the air, known as Light Detection And Ranging technology (LIDAR).

LIDAR measures the distance to a target by shining a laser light beam on the target, it is the same technology being used by law enforcement agencies now, in replace of radar guns, to measure the speed of a moving vehicle.

The drone in use for the test is called the Outlaw SeaHunter, developed by Griffon Aerospace in Huntsville, Alabama. The twin propeller drone has a 16-foot wingspan and a length of 9.9 feet, according to Griffon Aerospace. With a payload capacity of 90 pounds, the drone can fly for over four hours and over eight with an external fuel tank.

SeaHunter is the most capable member of Griffon’s unmanned aerial vehicle (UAV) family, it is designed as a cost effective, reliable, Class III Multi-engine platform. SeaHunters are currently being used by military, universities, and research agencies for training, testing, data collection, and system R&D.

The demonstration of the LIDAR technology will be a short-term project, so there won’t be a permanent presence of the Navy. That being said, it is suggested that the research associated with the project could lead to a better understanding of coastal ecology and wetlands ecology.

To see whether your company can take advantage of the R&D tax credit, speak to one of our expert advisers at Swanson Reed.

Could human gene therapy be the next cancer cure?

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Perry Hackett, a researcher at the University of Minnesota, had a significant breakthrough in using DNA to fight cancer. Hackett received significant research and development funding due to his form of cancer treatment using viruses like no other treatments do.

Hackett has invented the Sleeping Beauty Transposon system, which is a basis for many cancer-fighting immunotherapies. Transposons are DNA that are not uniform throughout an organism, a concept which is easily seen throughout Indian corn, where the kernels are multicolored because a DNA element is hopping around the corn genome. It is named Sleeping Beauty because it was a gene that was active 13 million years ago, however went extinct.

Hackett began his research journey almost 40 years ago when he first started genetically engineering larger fish, however now his more recent work can reprogram a person’s immune system to fight cancer. Hackett explains that an immune system has memory, and it can target specific things that are bad for your body by targeting virus-infected cells. His breakthrough was introducing a gene into a cell that will recognize such foreign cells in the body.

Hackett’s virus differs from others in that traditional viruses are expensive to make and take a long time, however, the Sleeping Beauty Transposon is simple enough for an undergraduate student to make.

Hackett calls his research, “One of the grandest Minnesota fishing stories ever,” as initially he was working to find a way to improve the lives of fishermen by genetically engineering fish and eventually this research lead him to immunotherapy and finding a cutting-edge tool to treat cancer.

In addition to treating cancer, Hackett’s research has also lead to further understanding into how cancer progresses and how to correct genetic diseases that people inherit. In the future, therapies based on Hackett’s Transposon system could eliminate  or correct the symptoms of inherited diseases.

The university will continue working on this research, as a cancer treatment like this can provide 80% of people who use it with complete recovery or remission of cancer.

As a result of R&D grants, such as the one Perry Hackett received, innovative thinking and research can be rewarded, continue to progress and ultimately save millions of lives.

If your company is undertaking certain R&D activities, you may be eligible to claim the state and federal R&D tax credit, which can then be reinvested into the business. To find out whether your business qualifies, contact Swanson Reed R&D Tax Advisers.

$100 Million R&D facility opening at Rowan University NJ

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Rowan University, together with the senate president, Steve Sweeney, and lieutenant governor, Kim Guadagno, have announced that the Spanish multinational veterinary pharmaceutical company, HIPRA, will establish its North American headquarters in South Jersey Technology Park at Rowan University, New Jersey.

HIPRA will purchase 25 acres of the technology park’s 180 acres on Rowan’s west campus and invest $100 million into building the 375,000 square ft research and development facility, which will create over 200 new high-technology jobs.

“The United States is a critical market for our firm and its continued growth, the South Jersey Technology Park will provide the company with an ideal location to expand its operation in the United States and distribute its products worldwide. ” said Arnau Nogareda, HIPRA’s managing director.

According to Nogareda, the technology park was selected after evaluating numerous first-class host sites and consideration of research that had already been carried out, which showed to be impressive, particularly in the areas of science and engineering.

It is anticipated that by establishing the North American research headquarters in New Jersey, HIPRA will create short and long-term employment opportunities in diverse fields, such as construction and biomedical engineering. In addition, the facility also plans to open the door to spin off companies, benefit local businesses that will serve its employees, and will be especially valuable for the faculty and students working in the sciences, engineering and business.

HIPRA’s r&d technology park will be an excellent fit for the University’s overall goals, as it will attract new partnerships that provide opportunities for the faculty, and will allow students to conduct and produce real life research that will help to further develop the regional economy.

The HIPRA and Rowan University board are excited about the future outcomes resulting from the collaboration and are thrilled to be able to grow the concept of R&D projects in New Jersey, in hope it will spark encouragement for other companies to do the same.

To find out whether your company’s activities may qualify for the R&D Tax credit, contact Swanson Reed R&D Tax Advisers.

Alaska May Be Getting the World’s First Modern Cargo Airship

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Alaska may be the home base for the world’s first modern cargo airship once the aircraft is completed by Lockheed Martin’s assembly line in 2019.

The innovative aircraft involves an Anchorage logistics company that plans to use the helium-filled airship to carry freight and workers to remote sites.

The owner of PRL Logistics said the aircraft will safely support remote Alaska resource projects while giving emergency personnel another way to save people in areas that are difficult to get to.

“We hope this brings more work to Alaska,” said Ron Hyde, founder of PRL Logistics.

PRL Logistics will supply the ground support, like loading and offloading freight in Alaska and other areas.

The aircraft is not like your standard commercial jet. It moves across the sky at 65 mph and helium will provide 80% of the lift, with help from four engines. At 285 feet, it is longer than a 747 airplane and capable of carrying 22-ton loads.

“We don’t want to oversell it and say it can do everything and anything,” said Hyde. “Like any transportation asset, it will have limitations and those will become more known. But from an engineering perspective and everything we’ve been able to assess, we think this is a dependable and reliable option to move cargo and people.”

Please contact a Swanson Reed specialist for more information on the research and development tax credit.

GE opens oil and gas R&D center in Oklahoma

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Two test wells drilled deep underground and a well simulation towering five stories above, highlight the advanced research capabilities of GE’s Oil and Gas Technology Center.

GE have opened their oil and gas technology center in Oklahoma City, which is expected to become the central hub for the company’s scientists and engineers to collaborate with the oil and gas industry on digital and hardware solutions and advancements. The center consists of five stories and 125,000 sq ft of lab and office space, suitable for 230 employees.

The facility is designed to advance technology throughout the oil and natural gas industry, and is the company’s 10th worldwide research center, however, the first to specialize in one area.

GE’s CEO, Lorenzo Simonelli, says the research focus at the center will span across all areas of oil and gas such as; production solutions and well construction systems, oilfield facilities and systems, and reservoir performers. Simonelli believes a strong commitment to R&D will help the oil and gas customers find new efficiencies to work through tough market conditions and lead to transformational opportunities for the industry to thrive long term.

“This is a unique center from a global perspective and the plan is to be at the forefront and take the industry forward through applied technology,” Simonelli said. “Unconventional oil and gas drilling is taking place in other parts of the world. There is an opportunity to bring them in here to study and learn with others in the industry. This is going to provide the ability for commercialization of new technology and a new approach at a faster pace.”

The new technology center will accelerate innovation, the center will enable the full power of digital solutions and technology from across GE’s industrial businesses to advance the oil and gas industry.

While the oil and natural gas industry has used improved technology over the past decade to unlock vast amounts of oil and natural gas, the industry remains inefficient, said Mike Ming, general manager of the research facility. The new technology outcomes from this center will solve this issue by utilizing reserves in cost-effective and environmentally friendly ways and subsequently attracting companies from across the nation and around the world.

An innovative creation which has already been developed at the technology center is ‘Raven’ the prototype drone, engineered to detect emissions precisely and cost-effectively. ‘Raven’ has already been successfully piloted and was able to detect emissions from oilfield equipment at well sites in Arkansas. ‘Raven’ is one of many exciting developments to be produced from Oklahoma’s new research center.

To find out whether your company could qualify for the Federal Research Credit, Contact a Swanson Reed specialist.

Albuquerque builds $35 Million high-tech R&D hub!

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Construction of the first building in Albuquerque’s high-tech research and development hub has officially begun in Central and Broadway Downtown.

The $35 million, 160,000-square-foot facility will house the University of New Mexico’s tech-transfer office and Innovation Academy, along with start-ups and partners involved in collective efforts to build a bustling, high-tech business zone in the heart of Albuquerque. The building will also provide housing for students studying in the entrepreneurial education programs and launching businesses.

Citizens of Albuquerque are very excited about the construction progression of the city’s R&D hub and are eager to be the first to take a tour when it is due for completion in August 2017, they believe the facility will forever change Albuquerque’s downtown skyline and will revitalize the whole area.

The R&D hub will facilitate education for entrepreneurs, provide lab facilities for state research universities and will reserve 2,000 square feet for the Air Force Research Laboratory to open a tech-transfer office.

It is already predicted that the University of New Mexico will intake 500 students into their own academy section of the R&D facility. This Academy will allow students to receive direct experience and real-world skills in entrepreneurship. The academy will consist of meeting areas, classrooms, individual working spaces and a state-of-the-art visualization room.

Academy Director, Robert DelCampo, describes the R&D hub as a one-stop shop, as students will live upstairs in trendy apartments, work on new technology and business ideas downstairs, and then walk to the Supporting Technology Transfer Center next door to get help taking their developments to the market.

While building such an innovation facility may be a huge investment, New Mexico state board strongly supports encouraging the future of its current and upcoming generations. Innovation is the future, without innovation, fresh ideas cannot be developed, resulting in the demise of projects and organizations.

The people of Albuquerque identified the need to significantly invest in the future of its entrepreneurs, business owners and organizations, by building this R&D facility, and are highly optimistic about the positive future outcomes resulting from it.

If you are an entrepreneur, business owner or are simply wanting to know more about R&D and how you may be eligible for the R&D Tax credit, contact a Swanson Reed specialist today.

 

 

Massachusetts Scores Most Innovative U.S. State for the Second Year in a Row

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Massachusetts Ranks #1 in Bloomberg List of Most Innovative States

Massachusetts took the top spot once again in Bloomberg’s ranking of the most innovative U.S. state with California in a close second.

Although Massachusetts had less technology company density than in 2015, the state secured the number one spot by having more engineering and science graduates and jobs in those industries, according to Bloomberg data.

Each state was measured on a 0-100 scale across six pillars:

  • R&D intensity;
  • Productivity;
  • High-tech density;
  • Concentration of science, technology, engineering and mathematics employment;
  • Science and engineering degree holders; and
  • Patent activity.

Massachusetts recovered quickly from the last recession and has a 2.9 percent unemployment rate compared with a 4.6 percent national average.

What’s Massachusetts trick, you ask? Tax credits — especially those that promote research partnerships between companies and universities, like the R&D tax credit.

“Massachusetts got on a very early to the idea of trying to promote itself as an R&D center,” said Greg Sullivan, research director at Boston-based Pioneer Institute, a public policy research shop.

“Just shows the importance of the university cluster in Massachusetts, especially Harvard and MIT,” he continued.

Utah also deserves a shout-out for jumping six spots to number 14 from last year’s report. Bloomberg says this leap is due to an increase in R&D spending. Utah has followed in Massachusetts’ footsteps and focused on connecting education, government and local businesses.

California was followed by Washington, New Jersey and Maryland who took home spots 3, 4 and 5, respectively. If you jump to the bottom of the list, you will find Arkansas, West Virginia and Mississippi closing out the 2016 list.

If you are a business conducting R&D or any type of innovative work within the states, and are interested in learning more about the tax incentives available to you, please click here.

To speak with a Swanson Reed specialist, click here now.