By Mitchell Kopelman and Carli McDonald
Companies spanning a variety of industries rely on Federal and State Research and Development (R&D) Tax Credits to enhance innovation and finance product development and improvement. Every few years, CEOs and tax practitioners hold their breath waiting on Congress to pass legislation to extend these critical tax benefits. On Dec. 16, 2014, the U.S. Senate voted to extend the Federal R&D Tax Credit for the 16th time since its inception in 1981. Traditionally, the credit is extended in two year increments; however, this year the credit was extended for the 2014 tax year only, with the promise that tax reform is slated for 2015. Many state R&D tax credits rely on the Federal R&D Tax Credit, and Georgia is no exception. The decision to extend the federal credit is particularly important to companies performing R&D activities in Georgia.
The R&D Tax Credit helps companies remain competitive in the marketplace by allowing a dollar-for- dollar reduction of federal and state income taxes owed for qualified expenditures incident to the development or improvement of a product, process, software, formula or invention. The Federal R&D Credit can be used to offset federal income taxes to the extent qualified research expenditures exceed a base period amount. Business entities that do not pay federal corporate income tax, such as s-corporations and partnerships, are allowed to “pass-through” their Federal R&D Tax Credits to shareholders or partners. These individuals can only use the Federal R&D Credit to the extent their tax liability does not go below the Alternative Minimum Tax (AMT).
Each state uses a slightly different approach to calculate the R&D credit; the Georgia R&D Tax Credit can be used to offset up to 50 percent of Georgia income tax and carried forward for 10 years. Any excess Georgia R&D Credit can be applied to offset state payroll withholding.
As a result of the R&D Tax Credit’s expiration on Dec. 31, 2013, companies have not been able to record any 2014 R&D benefits on their financial statements all year. Since the president signed the legislation prior to Dec. 31, 2014, companies will be able to record the R&D benefit on their financial statements for the entire calendar year, during the quarter ended Dec. 31, 2014. This will impact a company’s effective tax rate during this quarter in a positive way.
Habif, Arogeti & Wynne (HA&W) evaluated R&D Tax Credits for more 150 clients in 2014, helping them secure more than $17 million in benefit. We expect to perform more than 200 studies in 2015. HA&W can help you determine whether your company qualifies for a Federal or State R&D Tax Credit, calculate and substantiate the credit, and guide you through the complicated regulations and filing procedures.
Mitchell Kopelman is the partner-in-charge of HA&W’s technology & biosciences group and its tax practice. Carli McDonald is the firm’s R&D Tax Credit senior manager.