Article
How eligible small businesses and individuals can offset AMT with R&D tax credits
May 2, 2018 · Authored by Star Fischer, Brian Short
With the passage of the 2017 tax reform law, commonly referred to as the Tax Cuts and Jobs Act (TCJA), the alternative minimum tax (AMT) remains in place for individuals, including those who have ownership in S corporations or partnerships. For C corporations, AMT is repealed beginning in 2018.
For certain taxpayers paying AMT, the R&D tax credit offers a unique opportunity for individuals or eligible small businesses (ESBs) to reduce AMT and their overall tax liability. ESBs include nonpublicly traded corporations, partnerships, or sole proprietors with average annual gross receipts over the prior three years of less than $50 million.
Who can benefit
For the tax years listed below, the following entity types may use the R&D tax credit to offset AMT.
2017 tax year
- Individuals
- ESBs, including pass-through entities and C corporations
2018 tax year and beyond
- Individuals
- ESBs, pass-through entities only
Background
The usability of the R&D tax credit continues to change. In the past, one of the main limitations on the use of the credit was the AMT, which required companies to pay a minimum federal tax rate, no matter how significant a company’s R&D tax credit.
With the passing of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), ESBs were able to use their R&D tax credits to offset AMT for years starting in 2016. Many small to midsize businesses have been able to reduce their AMT because of this change.
The opportunity for individuals and ESBs
Individuals or ESBs who are subject to AMT can offset regular taxes and AMT using the R&D tax credit. This opportunity allows a significant portion of an ESB’s R&D credit to be monetized.
Example
The following is an example of how the R&D credit could potentially benefit individuals and individuals who have ownership ESBs. In the example, the taxpayer saved an additional $43,750 in taxes by properly claiming the credit.
R&D tax credit eligibility
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.