What Does the Tax Cuts and Jobs Act of 2017 (“TCJA”) Mean for the R&D Tax Credit?

What Does the Tax Cuts and Jobs Act of 2017 (“TCJA”) Mean for the R&D Tax Credit?

Lacey J.S. Robb, JD, LLM – Northeast Practice Leader

Alex Bagne, JD, CPA, MBA, CCSP – President of ICS Tax, LLC

While many deductions and credits were repealed by TCJA, the final law preserved the Research and Development (“R&D”) tax credit, which was previously made permanent in the Protecting Americans against Tax Hikes (“PATH”) Act of 2015.  While the R&D tax credit was not directly changed, the following impact the value of the R&D credit:

Lower Corporate Tax Rate Increases the Net Benefit

  • The R&D tax credit’s net benefit is increased by approximately 21% due to the lowered corporate tax rate. The increase is due to IRC Section 280C(c), which was enacted to prevent double benefit of research related expenditures by being able to deduct the same expenditures used to calculate the R&D tax credit. 280C(c) requires taxpayers to reduce the R&D tax credit rate by the maximum corporate tax rate, which is now lower for 2018.

 

Repeal of the Corporate Alternative Minimum Tax (“AMT”) allows Increased Taxpayer Utilization

  • With the AMT repeal, taxpayers who would have been subject to AMT and were disallowed from utilizing the R&D tax credit are now able to do so without limitation to gross receipts earnings.
  • By eliminating the AMT’s Tentative Minimum Tax for corporations, the law allows the R&D tax credit to reduce a taxpayer’s liability down to 25% of the amount of net regular tax liability that exceeds $25,000, a limitation imposed by IRC Section 38(c).
  • For small and mid-sized companies, the new law does not have an impact, since the PATH Act allowed qualified small businesses (i.e., <$50 million gross receipts) to apply against AMT.

 

Limitation of Net Operating Loss (NOLs) Deductions Increases Value

  • NOLs are only able to offset 80% of taxable income for losses arising in tax years beginning after December 31, 2017.
  • Traditional R&D companies that carry a loss will find benefit now in the R&D tax credit to help offset taxes they will now have to pay.

 

The Orphan Drug Tax Credit is Significantly Reduced; Increases Value to R&D Tax Credit

  • The Orphan Drug tax credit has been lowered to 25% from 50% of a company’s costs related to clinical trials for developing rare disease treatments.
  • Companies that have not also piggybacked the R&D tax credit may need the additional tax relief.

The R&D tax credit benefits have been enhanced by the recent tax reform and can provide greater taxpayer benefits.  For a free consultation, please contact Lacey Robb or another ICS Tax Representative.

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ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices located throughout the country.